Research and Development (R&D) Tax Credits

Section 766 and Section 766A Taxes Consolidated Act (TCA) 1997

Background

Research and development are the keys to a more knowledge-intensive economy aimed at providing a sustainable, long-term basis for growth and employment. Finance (No.2) Act 2008 included significant enhancements to the existing scheme of tax credits for R&D, that will increase the scheme’s attractiveness to business, including small companies and those in the start-up phase. Taken together, these changes put Ireland to the forefront of R&D tax credit regimes globally.

The credits under sections 766 and 766A support the general economic policy objective of promoting R&D by reducing the costs of such activities to companies. This incentive, which is designed to increase Ireland’s attractiveness as a location for R&D and to provide a well-targeted stimulus for such value-added activities, is given effect through the tax system.

The Finance (No. 2) Act 2008 introduced a number of changes to both of these sections, including a time limit in respect of claims made on or after 1 January 2009. Such claims must be made within 12 months from the end of the accounting period in which the expenditure on R&D, giving rise to the claim, is incurred. This article sets out how the tax credit may be used in respect of expenditure incurred in accounting periods commencing on or after 1 January 2009.

Section 766 TCA 1997

S766 TCA 1997 provides for a tax credit for incremental R&D expenditure other than expenditure on buildings (the credit is available not only for salaries and other expenditure but also in respect of outlay on equipment).

For expenditure incurred in accounting periods commencing on or after 1/1/2009 the relief is calculated as 25% of qualifying expenditure. The credit is then first used to reduce the liability to Corporation Tax for that accounting period.

Claims made under section 766 on or after 1 January 2009 must be within 12 months from the end of the accounting period in which the expenditure on R&D was incurred.

Prior to Finance (No. 2) Act 2008, where a company had insufficient corporation tax against which to claim the R&D tax credit in a given accounting period, the tax credit could only be carried forward or allocated to other group members.

The Finance (No. 2) Act 2008 changed the way unused tax credits may be used. In respect of expenditure incurred in accounting periods commencing on or after 1 January 2009 the company may, in addition to the options mentioned above:

• offset that unused portion of the credit against corporation tax of the preceding accounting period – to create a tax refund.
• Where a company has offset the credit against the corporation tax of the preceding accounting period, or where no corporation tax arises for that period, and an excess still remains, the company may make a claim to have the amount of that excess paid to them by the Revenue Commissioners in 3 instalments. Thus the tax credit becomes a payable credit.

The 3 instalments will be paid over a period of 33 months from the end of the accounting period in which the expenditure was incurred.

• The first instalment to be paid will amount to 33% of the excess. (Note: the first instalment will be paid by the Revenue Commissioners not earlier than the return date for the CT1 for the period in which the expenditure giving rise to the excess was incurred).
• The remaining balance will then be used to reduce the corporation tax of the next accounting period and, if any excess still remains, a second instalment of 50% of that excess will be paid to the company. (Note: the second instalment will be paid by the Revenue Commissioners not earlier than 12 months immediately following the date on which the first instalment was paid).
• Any further excess remaining will then be used to reduce the corporation tax of the following accounting period and, if an excess still remains, that amount will be paid to the company as the third instalment. (Note: the third instalment will be paid not earlier than 24 months immediately following the date on which the first instalment was paid).

Section 36 Finance (No. 2) Act 2008 introduced a limit on the amount of tax credits payable to a company by Revenue. The amount cannot exceed the greater of:

• The corporation tax payable by the company for the 10 years prior to the accounting period preceding the period in which the expenditure was incurred, or
• The amount of PAYE, PRSI and levies, that the company is required to remit in the period in which the expenditure was incurred.

In the absence of a claim for payment, the excess will be carried forward for offset against corporation tax in the subsequent accounting period.

Example 1 (including changes in Finance (No. 2) Act 2008)

CBA Ltd incurred R&D expenditure and had corporation tax liabilities (before R&D tax credits) for the accounting periods ending 31 December in each of the following years:

Tax credits are calculated as follows:

• The tax credits for the years 2004 to 2008 (inclusive) can be offset against the corporation tax liability for the years in which the R&D expenditure was incurred and, if an excess still remains for any of those years, the tax credit may be carried forward and set against the following year(s)’ corporation tax liability.
• The tax credit for 2009, which relates to expenditure incurred in an accounting period commencing on or after 1 January 2009 may be offset against the corporation tax liability for 2009. Any remaining excess may be carried forward and set against the corporation tax liability for 2010.
• CBA Ltd does, however, have another option available to it in respect of the 2009 tax credit, in accordance with the changes to Section 766 TCA 1997 under the Finance (No 2) Act 2008.
• This change allows the company to first offset the 2009 tax credit against the corporation tax liability of the preceding year (2008). If an excess still remains the Revenue Commissioners will pay 33% of this excess to the company. The remaining balance will be treated in the manner previously outlined in this article.

Order of Offsets

Where excess credits are carried forward from years up to and including 2008 to 2009 the current period credits (2009) must be used first in preference to the excesses carried forward from the previous years.

Example 2 – Order of Offsets

PQR Ltd makes the following claim:

R&D tax credit due for 31/12/2009 in respect of expenditure incurred after 1 January 2009 is €9,000,000.

Unused credit carried forward from31/12/ 2008 is €4,000,000

• The tax credit in respect of expenditure incurred in 2009 is allowed in priority to an excess carried forward.
• The balance from 2008 (4,000,000 – 1,000,000) 3,000,000 will be carried forward to be set against the corporation tax liability for the next succeeding accounting period.
• An excess credit carried forward from an accounting period commencing before the operative date for the changes effected by Finance (No. 2) Act 2008 can only be carried forward and does not become a payable credit.

Section 766A TCA 1997

This provides for a tax credit for expenditure on buildings or structures used for R&D.

The Finance (No. 2) Act 2008 introduced a number of changes to this section, including a time limit in respect of claims made on or after 1 January 2009. Such claims must be made within 12 months from the end of the accounting period in which the expenditure on R&D, giving rise to the claim, is incurred.

• The changes to Section 766A TCA 1997, other than the new time limit, introduced in Finance (No. 2) Act 2008 came into operation on 24 September 2009 by virtue of Statutory Instrument No. 392 of 2009 as respects expenditure incurred after that date and in any accounting period commencing on or after 1 January 2009.

Changes to Section 766A TCA 1997 introduced by the Finance (No. 2) Act 2008

The new rules governing how a tax credit may be offset or otherwise used apply equally to tax credits claimed in respect of section 766A.

In addition, the credit will now be available in respect of new expenditure on the construction, including refurbishment, of a building or structure, where the R&D activities carried on by a company in that building or structure over a period of 4 years (referred to as the “specified relevant period”) represents at least 35 per cent of all activities carried on in the building or structure. The credit is calculated by reference only to the portion of the building or structure to be used for R&D activities. (This change recognises that R&D is often carried on in conjunction with other activities, such as manufacturing.)

The claw back provisions will apply where within 10 years of the accounting period in which the relevant expenditure was incurred, the building or structure is sold or ceases to be used by the company for R&D activities or for the purpose of the same trade that was carried on by the company at the start of the “specified relevant period”

The order of offsets applicable to Section 766A TCA 1997 is identical to the order that applies to Section 766 TCA 1997.

Example 3 - Post the Finance (No. 2) Act 2008 for expenditure incurred after 24 September 2009 in an accounting period commencing after 1 January 2009

On 1 November 2009, Rev Ltd incurred relevant R&D expenditure of €1,000,000 in respect of a building. Rev Ltd prepares accounts for each year ended 31 December. The R&D activities to be carried on by the company in that building over the specified relevant period will represent 40 per cent of all activities carried on in the building or structure for a period of 5 years. Thereafter R&D activities will represent only 10% of all activities carried on in the building or structure.

The tax credit under Section 766A in 2009 is calculated as follows:

Specified Relevant Expenditure = €1,000,000 @ 40% = €400,000

Tax credit = €400,000 @ 25% = €100,000

The full amount of the tax credit of €100,000 is used to first reduce the corporation tax liability in respect of the accounting period ended 31/12/09. If any excess remains it may be carried forward to reduce the corporation tax liability of the next accounting period, or alternatively if a claim is made by the company, it may be set against the corporation tax liability of the preceding accounting period to create a tax refund and any remaining excess may form part of the payable credit and may be paid to the company in 3 instalments over 33 months from the end of the accounting period in which the expenditure was incurred, i.e. 31/12/09. The manner of payment and the setoffs outlined above, in respect of section 766 apply also to section 766A. Similarly excess credit under section 766A, carried forward from an accounting period commencing before the operative date for the changes effected by Finance (No. 2) Act 2008, can only be carried forward and does not become a payable credit.

Claiming The Credit

• A claim in respect of the R&D tax credit made on or after 1 January 2009 must be made within 12 months of the end of the accounting period in which the expenditure on R&D was incurred.
• The tax credit should be claimed on the form CT1.
• If the amount of the credit is not known by the date of filing of form CT1, a company must make the claim within 12 months of the end of the accounting period in which the expenditure was incurred.
• In the event of a claim which is not included in a CT1, the claim must include all information required by the CT1.

Further Information

Please see Revenue Guidelines for Research and Development Tax Credit

or contact:

IsoldeHampson or John O’Neill,
Corporate Business and International Division,
Stamping Building,
Dublin Castle,
Dublin 2

e-mail: ihampson@revenue.ie
joneill@revenue.ie