Revenue Note for Guidance
This section provides relief for key employees engaged in research and development activities. The relief operates so as to allow such an employee avail of a reduction in his or her income tax liability as a result of the surrender by his or her employer company of some or all of the research and development credit to which that company was entitled (under section 766).
The section also provides that employees claiming the relief can only benefit from the reduction to the extent that the amount of income tax payable on his or her total income for the tax year of claim is not less than 23 per cent. The relief does not impact on an employee’s liability to the Universal Social Charge or to PRSI.
(1) “associated company”, in relation to a relevant employer, means a company which is that employer’s associated company within the meaning of section 432.
“control” has the same meaning as in section 432.
“emoluments” has the same meaning as in Chapter 4 of Part 42. (Schedule E emoluments)
“key employee” means an individual who –
in the accounting period for which his or her employer was entitled to claim relief under section 766(2), performed 50 per cent or more (75 per cent or more for 2012) of the duties of his or her employment in the conception or creation of new knowledge, products, processes, methods or systems.
In addition, in order for an individual to be a key employee, 50 per cent or more (75 per cent or more for 2012) of the cost of his or her emoluments from his or her employer must qualify as expenditure on research and development under section 766(1)(a) in the accounting period for which that employer would be entitled to claim relief under section 766.
“material interest”, in relation to a company, means the beneficial ownership of or ability to control, directly or through the medium of a connected company or connected companies or by any other indirect means, more than 5 per cent of the ordinary share capital of the company.
“ordinary share capital”, in relation to a company, means all the issued share capital (by whatever name called) of the company.
“relevant emoluments” means emoluments paid by a relevant employer to a key employee.
“relevant employer” means a company that employs a key employee and who is entitled to relief under section 766(2).
“tax year” means a year of assessment for income tax purposes.
(2) Where a company surrenders all or part of its research and development tax credit to a (2) key employee, that employee can, subject to the conditions set out in subsection (3), claim to have the income tax charged on his or her relevant emoluments from that company for a tax year reduced by the amount surrendered.
The tax year for which the claim can be made by a key employee is the tax year following the tax year in which the accounting period of the relevant employer company ends. That accounting period being the accounting period in respect of which the employer surrenders an amount under section 766(2A).
Where for a tax year an employee is no longer a key employee of the company that surrendered the credit, but remains an employee of that company, he or she shall still be entitled to claim the credit for that tax year provided that he or she was a key employee in the tax year in respect of which the credit was surrendered and provided the employer was a relevant employer in that year. This allows for the fact that there is a time lapse between the company surrendering the credit and the employee using the surrendered credit.
(3) The amount of relief that a key employee can claim in any tax year is limited by reference to his or her effective rate of tax for that year.
The amount surrendered to the key employee cannot reduce the amount of income tax payable on the total income of the employee (or the total income of his or her spouse/civil partner where joint assessment applies) to less than 23 per cent of such total income.
The restriction by reference to the effective rate applies equally in the years to which the relief is carried forward (see subsection (4)).
(4) Where, as a result of the restriction in subsection (3), a key employee cannot claim the full amount of the credit surrendered by his or her employer in a tax year, the amount not claimed can be carried forward to reduce the income tax liability of the next tax year and each succeeding tax year until relief for the full amount has been claimed or until the key employee ceases to be an employee of the relevant employer.
(5) The amount surrendered by a relevant employer to a key employee is exempt from income tax.
(6) A key employee cannot have the tax charged on his or her emoluments reduced until all tax deducted under the PAYE system by his or her employer from emoluments paid to him or her for the tax year to which the claim relates have been remitted by the relevant employer to the Collector-General. This condition applies to any tax year in which the employee is claiming credit, either by reference to new credit granted in respect of a tax year or credit carried forward from a previous tax year.
(7) Where for the tax year 2013 it is discovered that a key employee was not entitled to relief or part of the relief given under the section, or where it is discovered that the amount surrendered by his or her employer exceeded that which the employer was entitled to surrender, the key employee must pay to the Revenue Commissioners an amount equal to the excess relief claimed.
This subsection does not apply for the year 2014 and subsequent years. In those years, the tax foregone is recovered from the company instead of the employee. Section 766 refers.
(8) Where for the tax year 2013, the employer company fails to advise a key employee of a change to the amount originally surrendered, such failure does not exempt the employee from the obligation to pay to the Revenue Commissioners an amount equal to any excess relief claimed.
This subsection does not apply the year 2014 and subsequent years. In those years, the tax foregone is recovered from the company instead of the employee. Section 766 refers.
(9) Any individual making a claim under this section shall be required to file a return of (9) income for the year of assessment to which the claim relates.
For the year 2014 and subsequent years, an employee must file a tax return for all years in which he or she avails of a tax credit under this section, and not just the first year of claim. This is relevant to cases where an employee carries forward unused credit from one tax year to the next as is permitted by this section.
Relevant Date: Finance Act 2020