What are R&D Tax Credits in Ireland?

The R&D Tax Credits scheme was unveiled by Revenue back in the early 2000s. It has since proven to be a popular (and lucrative) way of rewarding companies to take on bold innovative work.

The credit is calculated at 25% of eligible expenditure and is used to reduce a company's Corporation Tax (CT). The 25% R&D tax credit is available on top of the 12.5% trading deduction available for revenue expenditure.

Where a company has insufficient Corporation Tax against which to claim the R&D tax credit in a given accounting period, the tax credit may be credited against the Corporation Tax for the preceding period, may be carried forward indefinitely or, if the company is a member of a group, allocated to other group members. The R&D credit can also be claimed by the company as a payable credit.

Eligibility Criteria for R&D Tax Credits in Ireland

To be eligible for R&D tax credits in Ireland, companies must meet the following criteria:

Company Status and Taxation:

• The applicant must be a company.
• The company must be within the charge to Irish tax.

Location of R&D Activities:

• The R&D activities must be undertaken within the European Economic Area (EEA) or the UK.
• For Irish tax resident companies, the expenditure must not qualify for a tax deduction under the law of another territory.

Nature of R&D Activities:

• The activities must be systematic, investigative, or experimental.
• They must be conducted in a field of science or technology.

The activities should involve one or more of the following categories of R&D:

• Basic research.
• Applied research.
• Experimental development.

Scientific or Technological Advancement:

• The activities must seek to achieve scientific or technological advancement.
• They must involve the resolution of scientific or technological uncertainty.

Other Considerations:

• The R&D credit is calculated separately from the normal deduction of the R&D expenditure in computing the taxable profits of the company.
• Companies claiming the R&D credit are not required to hold the intellectual property rights resulting from the R&D work.
• There is no requirement for the R&D work to be successful.

By satisfying these criteria, companies can claim R&D tax credits, fostering innovation and technological advancement within Ireland.

How to Apply for R&D Tax Credits in Ireland

Applying for R&D Tax Credits in Ireland is a time-sensitive process with specific guidelines.

For claims under section 766 (R&D tax credit) and section 766C (R&D corporation tax credit), it is imperative to file within 12 months from the end of the accounting period during which the R&D expenditure occurred.

This timeline also applies to claims related to expenditure on buildings and structures intended for R&D purposes, under sections 766A or 766D.

From 1 January 2023 onwards, R&D corporation tax credit claims must be filed exclusively under sections 766C or 766D, as claims under sections 766 or 766A are not applicable for accounting periods starting from this date.

To make a claim, companies must complete the relevant sections of the Form CT1 via the Revenue Online System (ROS), ensuring compliance with the stipulated requirements and timelines as detailed in the Irish R&D Tax Manual.

Calculating Your R&D Tax Credit

Calculating the R&D tax credit in Ireland involves a few key steps and considerations:

Percentage of Qualifying Expenditure:

• The R&D tax credit, including the R&D corporation tax credit, is calculated as 25% of the qualifying expenditure.
• This applies to expenditure incurred in accounting periods commencing on or after January 1, 2009.

Example of Calculation:

For instance, if a company incurred €500,000 in qualifying R&D expenditure, the R&D Tax Credit would be €500,000 multiplied by 25%, resulting in a credit of €125,000.

Utilisation of the Tax Credit:

• For claims under sections 766 or 766A, the credit is first used to reduce the company's liability to Corporation Tax (CT) for that accounting period.
• If the company's CT liability is less than the R&D tax credit, the excess credit can be offset against the CT liability for the preceding period or carried forward indefinitely.
• Additionally, the company can claim the R&D tax credit as a payable credit.

Claims for R&D Corporation Tax Credit (Sections 766C or 766D):

• Following changes introduced by the Finance Act 2022, for claims made under sections 766C or 766D (effective for accounting periods ending on or after December 31, 2022), the R&D corporation tax credit is not used to reduce the CT liability for that period.
• Instead, companies can claim an amount equal to 25% of the qualifying expenditure.

This structure of calculation ensures that companies can accurately determine and maximise their benefits from engaging in R&D activities.

Legal and Regulatory Considerations

When applying for R&D tax credits in Ireland, it's crucial to consider the legal and regulatory framework that governs these incentives. Key considerations include:

• Compliance with Tax Laws: Understanding and adhering to the specific provisions of the Taxes Consolidation Act that relate to R&D tax credits.
• Documentation and Record-Keeping: Maintaining detailed records of R&D activities, expenditures, and their alignment with the criteria for tax credit eligibility.
• Adherence to Specific Sections of the Tax Act: Familiarity with sections 766, 766A, 766C, and 766D of the Taxes Consolidation Act, which outline the requirements and processes for R&D tax credit claims.
• Understanding Recent Amendments: Keeping up-to-date with any changes in the law, such as those introduced in the Finance Act, which may affect how R&D tax credits are claimed and utilised.
• Dealing with Revenue Audits: Preparing for potential audits by the Revenue Commissioners, which may include scrutiny of the R&D tax credit claims and associated documentation.
• Eligibility of R&D Activities: Ensuring that the R&D activities meet the legal definitions and criteria set out in the relevant legislation.

By considering these legal and regulatory aspects, companies can better navigate the complexities of claiming R&D tax credits in Ireland, ensuring compliance and maximising their potential benefits.

Key points

Ireland's R&D tax credit system offers a valuable opportunity for businesses to innovate and grow. Eligibility hinges on being a tax-paying company engaging in qualifying R&D activities within specific scientific and technological fields.

These credits, calculated at 25% of qualifying expenses, provide substantial financial incentives. The application process is straightforward but must be completed within 12 months of the incurred expenditure, emphasising the importance of timely action.

With the R&D corporation tax credit, companies don't need to offset against their current year's tax liability, offering more flexibility. 

By embracing R&D activities and effectively leveraging these tax credits, businesses in Ireland can not only contribute to technological advancement but also significantly enhance their competitive edge and financial health.

Get in touch

If you would like to discuss any aspect of R&D Tax Credits or the Tax Cloud portal, feel free to contact our friendly expert team on 020 7360 4437 or send us a message.

References:

For official information and guidance on R&D tax credits in Ireland, you can refer to the Revenue Commissioners' website, particularly the section dedicated to Research and Development (R&D) Tax Credit

Revenue Commissioners - R&D Tax Credit:

R&D Tax Credit Information

This page offers detailed information on the R&D tax credit, including eligibility criteria, how to apply, calculating the credit, and other relevant legal and regulatory considerations. It is an essential resource for companies seeking to understand and benefit from this tax incentive in Ireland.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud