Claiming a Tax Credit for Research & Development

Background

Section 33 of the Finance Act, 2004 introduced a 20% tax credit for companies for expenditure on research and development (R&D) activities. The credit is available on incremental qualifying expenditure over the amount spent in a base year. It has come to Revenue’s attention that some uncertainty exists regarding the procedures for claiming such a credit - in particular, the level of documentation required to be submitted with a claim. The procedures were put in place with a view to making the claiming of an R&D tax credit a straightforward process. The purpose of this article is to clarify those procedures.

Definition

The relevant legislation contains a specific definition of research and development, in line with international practice, which is designed to focus the relief on activities involving a high level of innovation across a broad range of industries.

‘Research and development activities’ is defined as ‘systematic, investigative or experimental activities in a field of science or technology, being basic research, applied research or experimental development’. A key provision Is that activities will not constitute research and development activities for the purposes of the relief unless they:

• seek to achieve scientific or technological advancement and
• involve the resolution of scientific or technological uncertainty.

Claimant companies are themselves best placed to evaluate whether their activities come within the definition. However, if a company has concerns about a particular aspect of their claim, Revenue is prepared to give an advance opinion as to whether the activities of a specific project constitute research and development activities.

Claiming The Credit

Where a company is satisfied that it can comply with the requirements, a claim to relief may be made by completing Section 12 (headed Research And Development Tax Credit) of the form CT1. It is important to note that no supporting documentation is required to be submitted with the return. In this respect, claiming a research and development tax credit is no different from claiming any other corporation tax relief or tax credit.

Examination by Revenue

Revenue may examine any aspect of a return, including a claim to a research and development tax credit, within four years of the end of the accounting period in which the company has made the return. Revenue may, if necessary, refer the project to an expert in the field of science and technology for an opinion as to whether the activities constitute research and development activities, as defined.

It is the claimant company’s responsibility to maintain records which provide sufficient evidence that a project entails research and development activities. The types of records which are required include:

• project title and description
• purpose of the project undertaken (i.e. the hypothesis advanced)
• technologically feasible plan and/or methodology adopted
• status and/or progress reports
• problems encountered in the course of the project that identified areas of technological uncertainty and experimental development
• personnel involved in the project
• notebooks, lab reports, patents, and patent applications

In order to reduce the administrative burden on claimant companies, no particular format is specified. Given the high cost of research and development activities and the requirement for ongoing monitoring inherent in such projects, the records required for Revenue purposes should generally be available within a company for its own internal purposes.

Where expenditure is not wholly incurred for research and development purposes, Revenue will accept reasonable apportionment.

Further Information

Please see Revenue Guidelines for Research and Development Tax Credit or contact

Jim Byrne,
Direct Taxes Interpretation and International Division,
Stamping Building,
Dublin Castle,
Dublin 2.

e-mail: jimbyrne@revenue.ie