What Costs Can You Include in Your R&D Tax Credit Claim?

Research and development (R&D) is often mistakenly assumed to be something that only technology or pharmaceutical companies engage with. However, R&D is far more common than you’d think and can be found in every single sector in the Irish economy.

The R&D tax credit scheme backs companies with R&D activity with some tax relief. It is a great incentive for SMEs, but the rules for what can and can’t be included are tricky to navigate and getting it wrong can land you in hot water with Revenue.

What are R&D tax credits?

R&D tax credits are a government-backed scheme designed to encourage investment in innovation and is one of the most generous in the world, according to the OECD. Companies with qualifying R&D activity can claim a tax credit of 25% on eligible expenditure, which is additional to the standard 12.5% deduction.
This means for every €100 invested in R&D, companies can claim up to €37.50 back. This encourages Irish companies to spend money on innovation, placing Ireland at the forefront of innovation, encouraging job creation and boosting growth for businesses.

Qualifying R&D activity is systematic, investigative or experimental activity in the field of science or technology which is seeking to advance science or technology through the resolution of uncertainty. Essentially, if your company had to overcome scientific or technological difficulties in search of a solution, then you may qualify for R&D tax credits.

Companies must be subject to Irish Corporation Tax (CT), undertake qualifying R&D activities within the European Economic Area (EEA) or the UK and must not qualify for a tax deduction in another territory.

What costs are eligible?

Employee costs

Employee costs often form the largest chunk of an R&D claim. Wages, company pension contributions, Pay-Related Social Insurance (PSRI), health insurance and bonuses are all eligible expenditures. These costs, understood under the name ‘emoluments’, should be operated through the PAYE/PREM system.

Importantly, the eligibility of these costs is directly linked to the proportion of time spent on R&D by the individual. In practice, that means that if an employee spends 50% of their time directly working on R&D, then 50% of their emoluments are considered a qualifying expenditure.

However, HR costs, payroll team costs, canteen costs and similar costs will not be eligible as these are not directly linked to the carrying on of the R&D activity.

Overheads

Costs for overheads that relate specifically to the R&D project can be claimed in an R&D tax credit claim. Utilities, power, materials and other items which are totally consumed or transformed in the R&D process are covered here.

As with staff, utilities must be apportioned to the R&D project. These estimates can be difficult and it’s worth getting in touch with an R&D tax specialist for help apportioning and verifying the validity of your overhead costs.

Many clients have fallen at the stumbling block of rent, as it has specific conditions attached. Rented spaces are only eligible if they are integral to R&D activity, as in a laboratory or a cleanroom. Where rented spaces are not specialised to the R&D, they do not qualify. Regarding manufacturing facilities, rent is not covered by the R&D tax credit as the space is not exclusively used for R&D.

Materials used in the R&D process which may be of further use following the conclusion of the project must be treated with care. If the items are saleable, they do not qualify for R&D tax credits.

Software costs can sometimes be included, especially if the software was specifically designed to meet the needs of the R&D project. Getting in touch with an R&D tax specialist can clear up the confusion around software costs.

Externally provided workers

Agency staff or R&D outsourced to a third party or a third-level institution can be eligible but at a different rate. Third-party payments are limited to whichever is greater, 15% of the company’s overall spend or €100,000. Payment to a third-level institution is limited to 5% of the overall R&D spend or €100,000.

The amount claimed on outsourced R&D activity must not exceed the company’s own internal spend and the third-party provider must be notified that they cannot claim for the work they were contracted to carry out.

Payments made to clinical trial volunteers can be included in an R&D tax credit claim.

Intellectual Property

Royalty payments for the use of intellectual property may qualify, provided the payments are wholly incurred for the R&D project and the royalty is not income from a qualifying asset for the Knowledge Development Box. This tricky area of the R&D tax credit is where businesses are best to contact a specialist in R&D tax credits to confirm their eligibility.

How can you use your R&D tax credit?

Your R&D tax credit is used to reduce the Corporation Tax liability for the accounting period for which the credit was claimed. Where a company has insufficient Corporation Tax for the R&D tax credit to be claimed against, the tax credit can be credited for the preceding period and can be carried forward indefinitely (or even allocated to other group members for a company in a group).

The credit can be claimed as a payable credit if the Corporation Tax of the current and preceding accounting periods have both been offset and an excess remains. This credit is received in three instalments over 33 months (subject to conditions).

Companies have 12 months to claim their R&D tax credit from the end of the accounting period during which the qualifying R&D activity took place.

Get in touch with Myriad Associates

If you think that your company may have qualifying activity, or if any of the above has left you confused, get in touch with Myriad Associates. Our team of experts has a 100% success rate spanning 16 years and we can both secure and maximise your claim. Using an R&D tax specialist minimises the risk of error in your claim and your chances of a Revenue R&D tax credit audit are reduced dramatically.

Interested in seeing how your innovation could payout? Give us a call on +33 1 566 2001 or use our contact form for expert advice from our friendly professionals.