Is Your Company’s R&D Tax Credit Claim In Order?

Revenue are examining claims for Research & Development (R&D) Tax Credit, as audits reveal that some companies have overclaimed tax credits and refunds.

This is according to a Revenue statement quoted in Carl O’Brien’s article in today’s Irish Times.

The R&D Tax Credit Scheme allows companies a 25% tax credit for the cost of carrying out qualifying R&D activities.

This is in addition to the normal 12.5% writeoff against income for Corporation Tax purposes, and means that companies can recoup 37.5% of such costs against their tax liabilities.

For example a company spends €100,000 (eg wage costs) on a qualifying R&D activity.

They claim this expenditure as a deduction in their accounts and Corporation Tax return. This yields a 12.5% tax saving, worth €12,500.

They can also claim a further 25% credit if the cost relates to a “qualifying R&D activity”. This yields a further 25% tax saving, worth €25,000.

The total tax saving is €37,000, on spending of €100,000.

It is easy to see that the scheme can be very lucrative. Over 1,200 companies have availed of it to date, and in 2010 they claimed approx. €224 million in tax reliefs. However it is not a free lunch and there are detailed terms and conditions.

Revenue are now concerned that some firms have breached these terms by overclaiming R&D credits, and they are now beefing up their audit programme in response.

The Irish Times claim that audits of 32 companies have uncovered 26 cases where a total of €6 million was overclaimed. However the majority of cases are said to have involved “accounting errors” and in only one case was a tax credits claim ruled fully out of order.

If you own or work in an R&D claimant company, the lessons are clear:

• You must ensure that each claim refers to a properly qualifying research and development activity.
• Where a cost refers only partly to an R&D activity (eg staff hired to carry on R&D and other work) it is important to correctly apportion the R&D and other elements. If anything, it pays to be conservative in apportioning R&D and non-R&D costs.
• All R&D spending must be clearly documented as such and you must keep detailed records of all R&D activity.
• Don’t forget that the scheme only covers incremental expenditure over the total of such spending in the 2003 base year, and is also subject to further limits based on historic Corporation Tax payments and payroll costs.
• Remember that grant-aided expenditure is wholly excluded from the R&D credit scheme.

For more, see:

• The Revenue Commissioners Guidelines for the Research & Development Tax Credit.
• The Revenue.ie webpage for the R&D Credit.
• Today’s Irish Times article.

If you have any queries or concerns on the R&D Tax Credit, you should seek quality professional advice.