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R&D tax credit. IMDA 6 July 2011 Stephen Merriman Aidan Lucey. Agenda. Evolution of R&D tax credit scheme Provisions of scheme Monetisation mechanism R&D legislative caps What is R&D? “Above the line” treatment R&D in Medical Devices Sector Revenue Audits

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r d tax credit

R&D tax credit


6 July 2011

Stephen Merriman

Aidan Lucey


Evolution of R&D tax credit scheme

Provisions of scheme

Monetisation mechanism

R&D legislative caps

What is R&D?

“Above the line” treatment

R&D in Medical Devices Sector

Revenue Audits


r d tax credit provisions of scheme
R&D tax credit - Provisions of scheme

Introduced in 2004 as part of EU Framework for increasing R&D activity

Enhanced in successive Finance Acts

Cornerstone of Irish economic policy

r d tax credit provisions of scheme1
R&D tax Credit - Provisions of scheme

Tax credit of 25% for incremental expenditure on R&D  effective CT deduction of 37.5%

Incremental basis - Base year frozen at 2003

Includes both revenue and capital expenditure - salaries - direct / indirect costs - equipment

r d tax credit r d buildings
R&D tax credit – R&D Buildings

Previous requirement for buildings to be used “wholly and exclusively” for R&D

Finance Act (no.2) 2008 introduced 35% R&D activity threshold – relevant for R&D carried on in manufacturing environment

Full credit available in year in which expenditure is incurred

r d tax credit provisions of scheme2
R&D tax credit - Provisions of scheme
  • Revenue expenditure
  • • - Incremental R&D expenditure
  • - Labour costs
  • - Consumables/utilities
  • Qualifying R&D: €10m
  • Credit 25%: €2.5m
  • Effectively reduces R&D salaries etc by 25%
  • Capital expenditure
  • - Incremental R&D expenditure
  • - Plant & machinery
  • - Computers
  • Qualifying R&D: €10m
  • Credit 25%: €2.5m
  • Effectively reduces cost of P&M by 25%



100% TAX


r d tax credit provisions of scheme3
R&D tax credit - Provisions of scheme

Credit is used against corporation tax liability in first instance or set back against prior year

Credit can be surrendered to group companies

“Monetisation” of credit - excess credit repayable (subject to greater of corporation tax or PAYE cap)

Benefit of credit can be taken “above the line”

r d credit monetisation mechanism
R&D Credit – Monetisation mechanism

Set off against Corporation Tax liability in current year (Year 1)

Carry back of excess to prior year

Repayment of one-third of unutilised excess (subject to cap)

Balance remaining carried forward for offset against Corporation Tax liability in Year 2

Repayment of 50% of unutilised R&D Tax Credit in Year 2 (subject to cap) and balance carried to Year 3 for offset against Corporation Tax Liability

Any amount unutilised at end of Year 3 repaid (subject to cap)

r d credit monetisation mechanism1
R&D Credit – Monetisation mechanism






Used in Prior year = (€1,000,000)

Refunded in Year 1 = (€333,333) R&D Excess Credit utilised

Used in Year 2 = (€500,000) €2,000,000

Refunded in Year 2= (€83,334)

Used in Year 3 = (€83,334)

r d tax credit legislative caps
R&D tax credit – legislative caps

Restriction on payments to 3rd parties - sub-contractors (10%) - universities (5%)

Credit cannot be claimed on expenditure which is deductible in another EEA state

Refundable credits restricted to corporation tax or PAYE cap

All claims - 12 month window

above the line treatment1
“Above the line” treatment

Ability to take benefit of credit “above the line” in P&L

Increases competiveness of Ireland as R&D centre

Treatment acknowledged by ICAI / Revenue

Has been adopted in practice under Irish GAAP

Treatment under US GAAP is more ambiguous

r d tax credit what is r d
R&D tax credit – What is R&D?

Fundamental characteristics of qualifying R&D:

  • Field of science or technology
  • Systematic or investigative approach
  • Seek to achieve scientific or technological advancement
  • Must be scientific or technological uncertainty present
  • Must be Basic Research, Applied Research or Experimental Development
r d tax credit what is r d1
R&D tax credit – What is R&D?

Experimental development is very broad:

“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”

Design and Prototype Build

What is qualifying R&D?

Addressing contractual arrangements


Processing intellectual property

Marketing and

budgeting for new product

Duplicating an existing process or technology in a new way

Improvements toexisting products

Creating a new process, material,device or product

Activities in relation to product commercialisation

Other R&Dentitlement

Core R&D

Scale up in production

Resolving production problems that require R&D input

Support Services such as equipment maintenance, cleaning and repair

Design solely for cosmetic and aesthetic reasons

Management input to project meetings

Process Improvements

Concept and idea feasibility analysis

R&D Tax Credit

r d in medical devices sector1
R&D in medical devices sector

Traditional manufacturing activities have provided a springboard for companies to expand towards R&D in recent years

Generally in the field of medical sciences, natural sciences and engineering

Credit should be available in respect of both development of new devices and operational excellence (i.e. process R&D)

r d in medical devices sector issues
R&D in Medical Devices sector - issues


Collaboration with universities

Customer specifications

Validation batches

Who is doing the R&D?

r d in medical devices sector2
R&D in medical devices sector

Scale up often involves technological problems because of cost or reliability.

Manufacturing/production departments may make process changes to improve efficiency or speed or reduce cost.

Iterative changes, e.g. to reduce the materials used may also qualify as uncertain how much can be taken out

All these process changes may comprise R&D but the costs are often booked in cost of goods sold and in departments not included in the scope of claims and therefore omitted

revenue audits1
Revenue Audits

2 elements to Revenue audits:


- computation of credit /nature of costs / base period

- apportionment of overheads / P&M


- review of activities

- site visit by ‘expert’ in particular field

revenue audits2
Revenue Audits

Preparation for Revenue queries – ‘Defence File’

revenue audits3
Revenue Audits

Expanded list of Revenue queries


Companies who qualify for R&D tax credits may also qualify for R&D grants

Qualifying expenditure – capital, salaries, materials, travel, consultancy, technology, overheads

Average grant rate – 20% of total expenditure

Collaboration with universities can increase the grant rate

Grant funding cannot be retrospective

Other types of grant may also be available