A 20% tax credit applies to incremental expenditure on certain R&D incurred by companies that are themselves trading or are members (more than 50% owned) of a trading group. This tax credit is in addition to the corporate tax deduction available.  The tax credit is available for offset against current year corporation tax liability and any unused credit can be carried forward indefinitely to future periods.

Expenditure incurred by companies under 51% common ultimate ownership is aggregated and the credit can be attributed between the trading members of the group in proportions nominated by the taxpayer. In the absence of an election, the R&D credit will be allocated to group companies on a pro rata basis. Expenditure on R&D incurred by non-trading companies, or qualifying 51% subsidiaries that subsequently commence to carry on a trade, is treated as if the company/subsidiary had commenced to carry on a trade at the time the expenditure was incurred, and the credit is available from that date.

Base period:

The R&D tax credit system is based on incremental expenditure on R&D. In the case of a company with a calendar year end, the incremental R&D expenditure incurred in 2004 over that incurred in 2003 will qualify for R&D tax credit. 2003 will continue to be the base year for 2005 and 2006. Thereafter, the base year will be 2004 for year ended 2007, 2005 for year ended 2008 etc.

Where there are changes in the group structure in the two periods, the group that is in place in the base year is deemed to be the same as the group that is in place in the subsequent year if there is a reasonable commonality of identity in the group.

Qualifying expenditure:

The company must incur expenditure in carrying on R&D activities in the European Economic Area. To qualify for credit the expenditure must be deductible only in Ireland and not in any other country (e.g. in a branch outside Ireland). The expenditure must be incurred on systematic, investigative or experimental activities in a field of science or technology that falls within any of the following categories:

• basic research to acquire new scientific or technical knowledge without a specific practical application in mind
• applied research to acquire scientific or technical knowledge and directed towards a specific practical application
• experimental work which draws on scientific or technical knowledge or practical experiences for the purpose of achieving technological advancement and which is directed towards producing new, or improving existing, materials, products, devices, processes, systems or services.

Systematic, investigative or experimental activities:

The R&D activities must be systematic, investigative or experimental in nature. The guidelines issued by the Irish tax authorities require documentation to be maintained on:

• the nature of the project, the objective of the research and the research method
• the field of science or technology concerned
• the scientific or technological uncertainty that is being addressed by the R&D and the project's scientific or technological goals
• a detailed research programme
• skills and qualifications of the research team
• time records
• expenditure analysis, including third party expenses and royalty payments.

The Irish tax authorities are prepared to give an advance opinion as to whether a particular project would qualify for an R&D tax credit.

Science or technology:

Regulations have been issued outlining the categories of activities that fall within the field of science or technology under the headings of natural sciences (specifically including mathematics, computer science and software), engineering and technology, medical sciences and agricultural sciences.

Research and development activities:

The R&D activity must seek to achieve scientific or technological advancement and involve the resolution of scientific or technological uncertainty through systematic, investigative or experimental activities.  The resulting scientific or technological advancement must not just improve a company's scientific or technological capability but must also seek to provide additional knowledge or capability that is not already reasonably available in the public domain. A company must seek to achieve (as opposed to succeed in achieving) scientific or technological advancement.  The R&D guidelines as published indicate that process R&D or activities directed at producing new or improved materials, products, devices, processes, systems or services will not qualify for an R&D tax credit unless the R&D activities undertaken achieve scientific or technological advancement or resolution of scientific or technological uncertainty. Therefore, process R&D achieved through the introduction of new organisation methods or the application/improvement of a computer process may not come within the definition of R&D activities. In the case of improvements to materials, products, devices, processes, systems, purchase/licence of rights, the resolution of technical problems or trouble-shooting, no R&D tax credit is available unless scientific or technological advancement is achieved or scientific or technological uncertainty is resolved.

Detailed guidance on expenditure:

A list of activities that do not constitute R&D activities is set out in the guidelines e.g. quality control,  cosmetic modifications or stylistic changes to products, processes or production methods, corrective action arising from breakdowns during commercial production, market research/testing etc. The guidelines also identify qualifying expenditure as including staff and overhead costs, indirect support activities (maintenance, security, administration costs), incidental expenses to third parties (training, cost of acquiring published research) and royalty payments that are not tax-exempt in the hands of the recipient  Where a company incurs qualifying R&D expenditure that is reimbursed under a cost sharing agreement, it will qualify for R&D credits in respect of the entire Irish R&D activities undertaken. There is limited scope for subcontracting R&D activities. Sums paid to universities or institutes of education in the EEA to carry out R&D will qualify for relief up to a limit of 5% of R&D expenditure incurred by the company or group.

Example:

Additional credit for R&D facilities:

A separate R&D tax credit is also available for capital expenditure on R&D building facilities. This tax credit is 20% and will be given over a period of 4 years but is not limited to incremental expenditure. Any excess credit can be carried forward indefinitely to future periods or the credit can be transferred to other group companies in Ireland.

Example:

Phase 3 – Disposal of IP rights | Appendix II - 0% on patent royalty income