| 2004 |
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YEAR BOOK |
Gorman Quigley Penrose
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Research & Development – a possible tax bonus?
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The details were provided in Section 33 of the Finance Act 2004 but EU approval was required to introduce the legislation. This approval subsequently came through in July 2004, at which stage Mr. McCreevy, in one of his final acts before he departed to Brussels as Ireland's EU Commissioner, signed the relevant commencement order.
Background
The corporate tax rate in the Republic of Ireland, for most companies, is 12.5%. Heretofore, at best, expenditure on research and development was allowed at this marginal rate. However of even greater concern to potential research companies was the inability to offset relevant expenditure against general trading income. In common with the legislation in most EU countries, Irish Tax Law only allowed relevant research and development expenditure to be offset against income generated by such expenditure. This regularly gave rise to difficulties in securing tax benefits for such research and development expenditure.
Similar problems arose with capital expenditure on buildings which attracted some, but very limited, tax allowances.
Research & Development Expenditure – Tax Relief
The new provisions introduce a 20% tax credit to companies for incremental qualifying expenditure over the amount spent in a base year, on research and development activities.
The tax credit is available to all companies, within the charge to Irish Tax, which undertake research and development activities within the European Economic Area (EEA). The credit for non Irish expenditure is only available to Irish tax resident companies if such expenditure on research and development is not otherwise available for tax benefit elsewhere.
The tax credit is available on incremental R & D expenditure using a rolling base. Generally, the base year is the year three years prior to the year in which the claim expenditure is undertaken. However, for the periods from 1st January 2004 to 31st December 2006, the base will be the expenditure incurred in a corresponding period in 2003.
Where the R & D company does not trade, the company may nevertheless qualify for the credit if it is a 51% subsidiary of a trading company. This allows expenditure incurred by a dedicated R & D company of a trading group to qualify for the relief.
Also, where the company is not a member of a trading group and is in its pre-trading phase, provision is made to allow R & D carried out by that company to qualify for the credit at a later date. The credit can be used when the company commences trading and has a corporation tax liability. This facilitates the claiming of credits by campus companies when they commence trading.
Definition of Research & Development
Research and development, for the purpose of the relief, includes basic research, applied research or experimental development. These activities must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.
Basic Research is defined as "experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge without a specific practical application in view".
Applied Research means "work undertaken in order to gain scientific or technical knowledge and directed towards a specific practical application".
Experimental Development is "work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvement thereto".
Capital Expenditure
Buildings are treated separately in calculating the research and development tax credit. A credit of 20% of the cost of a building used for the purpose of research and development is available on a straight line basis over four years. The computation of credit is made by reference to expenditure incurred in a group as opposed to on a company by company basis.
Tax credit is clawed back if the building or structure is sold or ceases to be used for the purpose of research and development activities within ten years of construction. It should be noted expenditure which is met by any grant assistance is not considered to be expenditure incurred and will therefore not be eligible for the special tax credit.
Out Sourcing – Third Level Institutions
In general, the cost of sub-contracting or out sourcing research and development will not qualify for the tax credit. However, an amount of up to 5% of the total research and development expenditure, which is paid to a university or institute of higher education to carry on research and development activity may qualify.
Conclusion
In announcing the new legislation, Mr. McCreevy said "research and development is the key to a more knowledge-intensive economy aimed at providing a sustainable long term basis for growth in employment and incomes. The tax credit for research and development will help to enhance our competitiveness as a location for new internationally mobile research related investment, and will encourage existing overseas and indigenous firms to add research functions to their operations in Ireland or to increase their level of research activities".
His colleague – Tánaiste & Minister for Enterprise Trade & Employment Ms Mary Harney, T.D., added "The overall aim of the research and development tax credit is to encourage an increase in the amount of research and development carried out by companies and to make Ireland an attractive destination for foreign companies to commence or increase research and development". She continued "Specifically, we are seeking to encourage activities which will contribute to an enhancement of the calibre of research and development in Ireland and create high quality jobs and opportunities for our work force".
The new legislation should improve the incentive for research and development by Irish companies. It also encourages potential alliances between the corporate sector and third level institutions for the purpose of research and development expenditure.
The foregoing represents a broad outline of the new tax legislation. Professional advice should be sought for a more detailed consideration of the relevant tax law.
Contact: Terry Quigley, Gorman Quigley Penrose (Chartered Accountants), 31/32 Greenmount Office Park, Harolds Cross Bridge, Dublin 6W; Tel: (01) 4535066; Email: [email protected]