Research and Development Tax Credit

A tax credit of 25% is available in certain circumstances for companies in respect of expenditure on research and development (R&D) activities. R&D activities are defined as “systematic, investigative or experimental activities in a field of science or technology, being basic research, applied research or experimental development”.

R&D activities

An important provision is that activities will not constitute R&D activities for the purpose of the relief unless they seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty.

Normal technology transfer or making improvements to materials, products, devices, processes, systems or services through the purchase of rights or a licence or through the adaptation of known principles or knowledge would not represent scientific or technological advancement. For example, the development of an updated version of a computer software package using existing tools and knowledge would not involve a technological advance.  If on the other hand an enhanced feature arose from new technology developed by the company, that element of the expenditure relating to the development of the new technology would qualify for the R&D tax credit.

It should be noted that an advance in science or technology means an advance in the overall knowledge or capability in the field of science or technology and not just a company’s own state of knowledge or capability alone.  Work which uses science or technology, but which does not advance science or technological capability as a whole, is not an advance in science or technology for the purposes of the tax credit.

Non qualifying activities

The regulations specify a non-exhaustive list of activities which are not R&D activities including:

  • Research in the social sciences (including economics and business management), arts or humanities.
  • Routine testing and analysis for the purposes of quality or quantity control.
  • Corrective action in connection with breakdowns during commercial production of a product.
  • Market research, market testing, market development, sales promotion or consumer surveys.
  • Exploring or drilling for, or producing minerals, petroleum or natural gas.

Grants

Any expenditure which is met directly or indirectly by any grant from the State, any Board established by statute, any public or local authority or any other agency of the State will not qualify for the relief.

Supporting documentation

If a company is entitled to claim the R&D tax credit it is required to keep and retain detailed records of its R&D work as follows:

  • A description of the R&D activities, the methods to be used and what the company seeks to achieve by undertaking the activities concerned.
  • The field of science and technology concerned.
  • The scientific or technological advancement that is the goal of the R&D activities and the scientific and technological uncertainty that the company is seeking to resolve by those activities. (This should be supported by expert opinion, where available, that the goals are authentic given the reasonably available information on the state of technology or science).
  • Details of the systematic investigation as previously outlined, including:
  • The hypothesis advanced.
  • The series of experiments or investigations undertaken to test the hypothesis.
  • Documentary evidence of the necessity for each major element and how it fits in to the project as a whole.
  • Dated documents of the original scientific or technological goals, the progress of the work, how it was carried out and the conclusions.
  • Indicators or measures identified at the commencement of the project to determine if the scientific or technological objectives of the R&D activities are met.
  • The qualifications, skill and experience of the project manager.
  • The numbers, qualifications and skill levels of other personnel working on the project.
  • The hours worked by the personnel working on the project.
  • The expenses that can be identified as being wholly, exclusively and necessarily paid in connection with the project, the reasons for each item of expenditure and how it fits in with the project, and where the expenses are apportioned between qualifying and non-qualifying activities, the rationale for the apportionment.
  • Evidence that, apart from incidental expenditure, and payments to universities and institutions the majority was spent on in-house activities.
  • Details of expenses to third parties.
  • Details of royalty payments other than excluded royalty payments.

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Please call Noel Murphy today on 083 015 3313 if you need further information on Research and Development tax credit or a consultation.