Claims for Research and Development (R&D) Tax Credit

Projects Approved for Research Technology & Innovation [RTI] Grants from Enterprise Ireland

Background

Section 766 TCA 1997 provides for a tax credit of 20% of incremental expenditure by a company or group of companies on research and development (R&D). Expenditure on buildings is not taken into account in calculating the incremental expenditure. Section 766A contains rules for the treatment of expenditure on buildings. The purpose of this article is to simplify administrative procedures for smaller claims in receipt of Research Technology & Innovation (RTI) grants from Enterprise Ireland.

Definition

Research and development activities is defined in Section 766A 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 be 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.

Examination of a Claim

The process of examining a claim may be considered by reference to two criteria:

• The Science Test: that the activities under review are consistent with the statutory definition of research and development activities.
• The Accounting Test: that the expenditure claimed as being laid out on qualifying research and development activities is correctly so claimed.

Experts within a claimant company should have no difficulty in deciding whether the Science Test is satisfied. In the absence of in-house expertise in specialised fields of science and technology, it has been necessary for Revenue to employ experts to provide opinion as to whether an activity would satisfy the Science Test.

Compatibility with RTI Grants

In broad terms, the definition of R&D contained in Section 766 TCA 1997 and the Enterprise Ireland grant-aided scheme for RTI grants are comparable and are both based on the OECD Frascati definition. Unlike the tax credit relief, the RTI scheme does not explicitly require that activities seek to achieve scientific or technological advancement. However, a requirement that a project must represent an advance in the level of technical innovation relative to the company’s current products/processes is quite similar. The receipt of such a grant is thus a strong indicator of eligibility for the tax credit.

With a view to simplifying administrative procedures for smaller claims and minimising the need to engage experts to verify tax credit claims, it has been decided that Revenue would not, as a rule, seek to independently/separately have a claim in respect of smaller projects examined by an expert, where an Enterprise Ireland RTI grant has been approved in respect of the project. This practice will apply where:

• the project has been the subject of an RTI grant, and
• the R&D tax credit claimed for an accounting period (of not less than 12 months) is €50,000 or less, and
• the project is undertaken in a prescribed field of science or technology, as defined in regulations (S.I. No. 434 of 2004).

Limits to Practice

This treatment applies only to RTI grants administered by Enterprise Ireland and not any other grant, whether for R&D or otherwise. Companies may claim a tax credit, up to and including the amount indicated, in respect of activities arising in a number of projects. Not all of those activities or projects will be grantaided. Therefore the receipt of a grant would not be an indication that the entire claim qualifies for the credit.

Moreover, in respect of grant-aided and other projects, all the claimed cost will not necessarily qualify. Where an R&D tax credit is claimed for an accounting period, all claims examined in the course of a Revenue audit must be subjected to the accounting test to ensure that costs correctly attributable to other activities are not included as R&D costs and that any allocations of cost are reasonably and correctly so allocated. Revenue may from time to time, on a risk basis, check a number of claims supported by RTI grants.

Further Information

Please see Revenue Guidelines for Research and Development Tax Credit:
or contact
Isolde Hampson,
Direct Taxes Interpretation and International Division,
Stamping Building,
Dublin Castle,
Dublin 2
E-mail: ihampson@revenue.ie