R&D tax credits now more generous

IN 2004 THE Government introduced a research and development (RD) tax credit regime, aimed at encouraging companies to develop higher value added activities.

While larger manufacturing firms and multinational corporations operating in the pharmaceutical and software sectors have been quick to avail of the benefits on offer, the tax credits are much more widely available than many people believe, and have been significantly improved in this year's Finance Bill.

Ken Hardy, a tax partner with KPMG, says there are no restrictions on company size. He has worked on claiming the credits with all kinds of companies from five-man operations up to firms with 5,000 employees. Moreover, he says that almost any company, operating in any sector, is generally eligible.

"One might be surprised where RD takes place in Ireland," he says, adding, "It's not just about white coats and Bunsen burners."

Hardy has worked with companies across a broad range of activities, including breweries, banks, abattoirs and building materials, and has advised on tax credits ranging from "€25,000 to tens of millions".

One of the sectors to avail most of the credits, perhaps surprisingly, is financial services.

Since 2004, companies such as Citi, Merrill Lynch and most recently insurance firm Aon, which is creating a research and development technology centre in Dublin, have established specific RD projects.

According to Hardy, the current RD tax credit scheme is "quite generous", as it offers a 20 per cent credit on any incremental RD conducted by a firm over the base year of 2003. The credit is actually worth more to most companies than a VAT refund, he says.

Moreover, from January 1st, the credit is set to increase to 25 per cent, while the introduction of a payable tax credit will be of significant benefit to smaller companies and start-ups, which are not yet paying corporation tax, says Tanguy Morel, a partner with Leyton Associates.

"This is very good news for smaller companies and pre-revenue start-ups who are spending on RD, as they can now get the benefit," he says. In order to qualify for RD tax credits, companies must comply with the "Frascati" definition of RD, which requires firms to satisfy four main conditions, says Morel:

1)You must seek to solve technical uncertainty;

2)You must try to achieve technological advancements;

3)The project must be in the field of science and technology;

4)The project must be systematic, investigative or experimental.

For a more simplistic definition, Hardy puts forward the "red-faced" test.

"If you can get up in front of a group of your peers and describe your RD activity without getting red-faced, then there is potential for availing of the tax credits," he says. There are five types of expenditure which qualify for the RD tax credit:

1) activities undertaken in-house;

2) incidental expenses to third parties, such as the costs of training of staff directly involved in the RD activities;

3) royalties incurred in the carrying on of RD activities;

4) payment to a third-level college for sub-contracted RD activities;

5) expenditure incurred for subcontracted activities.

The tax credit is calculated on the amount of qualifying RD expenditure that exceeds a threshold amount.

A credit is available only in respect of incremental qualifying expenditure and is based on a company's spend in the base year of 2003.

"For example, a company which had no RD activity in 2003, and had RD expenses of €1 million in 2007, can claim a tax credit of €200,000," says Morel.

While the new RD tax credit regime will be very generous, in light of increasing competition from countries such as France, Britain, Poland and the Czech Republic to attract RD projects, Hardy says there is scope to improve the regime further.

"Ireland has to maintain its attractiveness and competitiveness," says Morel, and he echoes the view expressed by many that setting the base qualifying year as 2003 is unattractive to companies that had particularly high levels of RD activity in that year and, as a result, it should be re-examined.