Manufacturing companies in Ireland who undertake qualifying research and development activities can avail of generous R&D tax credits, however, it is important to ensure that the R&D activities are qualifying and can be substantiated, explains FPM Tax Partner, Malachy McLernon.
On the Island of Ireland, there are two tax jurisdictions and two tax authorities—HM Revenue & Customs (HMRC) in Northern Ireland and the Revenue Commissioners (Revenue) in the Republic. Both jurisdictions incentivise R&D by offering generous corporate tax relief in the form of R&D tax credits for manufacturing companies in Ireland undertaking qualifying research and development activities. While the tax credits are computed under different legislation in each jurisdiction, the two schemes share some similarities.
R&D Tax Relief Opportunities
What are R&D activities?
R&D activity is defined as technological or scientific advancement through the resolution of uncertainties. There is a misconception that R&D tax relief only applies to companies undertaking ‘blue sky’ research, however, this is not always the case. Another misconception is that projects must be successful in order to claim R&D tax credits, however unsuccessful projects, and projects on hold due to uncertainties, may also be eligible for tax relief on qualifying R&D activities.
Are you engaged in qualifying R&D activity?
R&D activities vary from company to company. When considering whether the research and development that your company is doing is breaking new ground and qualifies as R&D activity for tax credit purposes, you will need to engage with the competent professionals working within your business such as your design engineers, general manager, project managers.
You and your team will need to consider what is the base-line technology and how your company is advancing this. You must be aiming to advance knowledge in the sector that your company operates within, rather than just your own company’s knowledge. Application of technologies that already exist is not qualifying R&D activity.
R&D activities involve a process of systematic investigation. This should be properly documented to ensure that all R&D activities and their respective costs are captured. There are many benefits to contemporaneous documentation including enhanced collaboration between different teams which can transform the progress and outcome of R&D projects.
While HMRC does not oblige you to keep contemporaneous documents, Revenue does require manufacturing companies in Ireland to keep this documentation. We always advise companies undertaking R&D activities to accurately record all R&D data in real-time.
Examples of qualifying R&D activities
- Development of new products or production processes;
- Use of existing technologies or new technologies in an application that they were not designed for;
- In-house process or machine innovation;
- Bespoke design solutions, for example, design of products using alternative materials.
R&D Eligibility Criteria for Manufacturing Companies in Ireland
1. Manufacturing companies in Northern Ireland/UK
For manufacturing companies in Northern Ireland to claim R&D tax credits, the tax relief available for qualifying R&D activities depends on factors such as company size and whether any of the project costs were funded or subsidised.
- Company size: There are two schemes that R&D relief can be claimed under —the Small Medium Enterprises scheme (SME) and the R&D Expenditure Credit (RDEC) scheme. Under the SME scheme, the tax relief available is an enhanced CT deduction at 230% which equates to an extra tax deduction of 25p for every £1 spent on R&D for profit making companies or up to 33p for every £1 spent on R&D for loss making companies. Large companies can claim relief under the RDEC scheme which provides a lower rate of tax relief equivalent to an extra tax deduction of 10p for every £1 spent on R&D.
- Funding: Manufacturing companies that receive grants can claim for qualifying R&D activities under the SME and RDEC schemes or just the RDEC scheme depending on whether the grant is notified state aid or de minimis aid.
- Capital allowances: R&D capital allowances can be claimed at a rate of 100% in addition to the Annual Investment Allowance.
- Loss making companies: In the event that a company is loss making, losses can be surrendered to receive a cash credit from HMRC. The amount of losses that can be surrendered is restricted to the lower of the enhanced R&D expenditure (230%) or the total unrelieved loss in the relevant accounting period.
- Restrictions on SME claims: With effect from 1 April 2021, there are restrictions on the tax credit SMEs can claim in any accounting period. A cap has been introduced to deter abuse of the SME R&D scheme. The maximum amount an SME can claim is £20,000 plus three times the company’s relevant expenditure on workers (total PAYE and NIC liability for the period) which can include PAYE and NIC liabilities related to connected parties. However, there are certain exemptions to this rule. The cap should not impact SME companies who have a substantial UK workforce, however, it will impact companies who have minimal or no UK employment costs as well as those who sub-contract R&D activities to a connected third party or recharge employment costs between connected parties.
2. Manufacturing companies in Ireland (RoI)
For manufacturing companies in Ireland to claim R&D tax credits, two tests need to be satisfied— a technical test and an accounting test. A company that has received an R&D grant from Enterprise Ireland may satisfy the technical test conditions subject to certain conditions.
The tax relief available is a 25% tax credit on qualifying expenditure. Therefore, on qualifying R&D expenditure, the total tax relief available would be 37.5% (25% R&D tax credit plus 12.5% Corporation Tax deduction.)
- Funding: Where a grant is received, this is deducted from the qualifying R&D costs and the tax credit calculated on the net amount.
- Using the R&D tax credit: The R&D tax credit can reduce the current or preceding year’s tax liability or be carried forward and offset against future liabilities. If the company is loss making, a refund can be received in three equal instalments over a three-year period.
- Proposed changes to R&D tax credit regime: There have been calls to reform the R&D tax credit scheme for small and micro companies in Ireland to make it more accessible and encourage smaller companies to invest in R&D activities. Proposed changes to the R&D tax credit scheme for small and micro businesses, which have not yet been introduced include an increased R&D tax credit rate (30%) and a change to how the R&D tax credit is calculated which would result in companies receiving a higher proportion of their R&D refund earlier than at present. Both of these measures, when introduced, will be a welcome boost for small and micro businesses.
Impact of Covid-19 on R&D Tax Credits
Both the UK and Irish Governments introduced various reliefs and supports to assist businesses during the Covid pandemic. If your company is making a claim for R&D tax credits, it is important to be aware of the impact that Covid supports could have on your claim.
The Coronavirus Job Retention Scheme and the Coronavirus Statutory Sick Pay Rebate Scheme in Northern Ireland and the Temporary Wage Subsidy Scheme and the Employment Wage Subsidy Scheme in the Republic of Ireland were introduced to support employment costs for businesses. As these schemes are considered assistance/subsidised expenditure, they will affect qualifying employment costs in your R&D tax credit claim.
The Coronavirus Statutory Sick Pay Rebate Scheme is a notifiable state aid. Therefore, if a claim was made for this rebate scheme for any member on the R&D team, the whole R&D project would fall under notified state aid rules in Northern Ireland, This means that an R&D claim could only be made on that project under the RDEC scheme.
If your company received any Covid related grants and used them for R&D activities, you will need to consider what impact, if any, this could have on your eligibility for R&D tax relief.
Getting your R&D claim wrong
When completing R&D claims, it is essential to establish that your company is carrying on qualifying R&D activities and that the conditions of the tax relief scheme are satisfied.
Getting the claim wrong can be costly. In addition to the stress and worry associated with a tax enquiry/audit, an incorrect claim can result in repayment of tax, interest charges and a penalty. It is important to remember, that once HRMC or Revenue process the R&D claim and where applicable, issue a tax refund, the claim can still be enquired into. HMRC has at least 1 year (with the exception of Advance Assurance) from the date of submission to investigate an R&D claim (the date can vary if it is a re-submission or if fraudulent claims have been submitted). Revenue has four years to enquire into an R&D tax credit claim.
The key to preparing a robust R&D claim is ensuring that proper records are maintained so that the technical and accounting aspects of the project can be easily ascertained and substantiated.