In our last update, we shared our insights into the increasing importance of understanding how and why Research and Development (R&D) incentives and concessions are part of an effective tax and economic policy, and what this means for multinational enterprises (MNE’s). In our latest article, we explore this important topic further.
MNE’s are likely to be entitled to innovation tax credits for many R&D projects that they undertake. However, despite the common principles that underlie many aspects of R&D, the technical requirements and the practical operation in each country can vary significantly. The best outcomes therefore will be achieved where MNE’s continually plan alternative scenarios and remain flexible on where and when future activities take place. We take a deeper look into what this really means for different jurisdictions.
What is the definition of R&D?
Let us start by looking at the UK. To qualify as R&D, the project must be seeking an advance in science or technology through the resolution of scientific or technological uncertainty in the UK. All the activities that contribute to the resolution of the scientific or technological uncertainty will be considered R&D.
Whilst in Ireland, the definition of qualifying R&D closely follows the OECD’s meaning. To qualify, a company’s R&D activities must:
- Involve systemic, investigative, or experimental activities.
- Be in the field of science or technology.
- Involve one or more of these categories of R&D:
- Basic research
- Applied research
- Experimental development
- Seek to make scientific or technological advancement.
- Involve the resolution of scientific or technological uncertainty.
In Canada however, there is the Scientific Research and Experimental Development (SR&ED) Programme which uses tax incentives to encourage Canadian businesses of all sizes and in all sectors to conduct R&D in Canada. These tax incentives come in three forms: an income tax deduction, an investment tax credit (ITC), and, in certain circumstances, a refund. SR&ED provides more than $3 billion in tax incentives to over 16,000 claimants annually, making it the single largest federal programme that supports business R&D in Canada.
The definition of SR&ED also describes why SR&ED is undertaken. This could include for the advancement of scientific knowledge, or for the purpose of achieving technological advancement aimed at creating new, or improving existing, materials, devices, products, or processes including incremental improvements.
The systematic investigation or search carried out in a field of science or technology by means of experiment or analysis must be seeking scientific or technological advancement for it to be SR&ED.
Work for the advancement of scientific knowledge or for the purpose of technological advancement implies an attempt to resolve what is called scientific uncertainty or technological uncertainty.
The three criteria can be summarised as follows:
- Technological uncertainty – the company is facing technological problems, limitations and constraints where is there is no solution in the public domain. There must be uncertainty as to ‘if’ or ‘how’ the uncertainty can be solved.
- Content – using a scientific method the uncertainty is solved by experimental trials, and analysis, and contemporaneous documentation is maintained.
- Technological Advancement – new knowledge was achieved or attempted.
Does the jurisdiction deliver the R&D concession by a deduction, grant or a tax credit?
- In the UK, the R&D concession is delivered by either a tax credit or an enhanced deduction. For small to medium sized businesses (SMEs), the benefit is a repayable tax credit, reduction in tax liability or increase in tax losses. For large companies, it is a repayable credit, or reduction in tax liability.
- In Ireland, the R&D concession is delivered by a tax credit only (including a potential refund).
- In Canada, the R&D concession is delivered by a tax credit. If the applicant is a Canadian Controlled Private Corporation, the tax credit is refundable, if no taxes are owing. For all other corporations, if there are no taxes owing, the credit can be applied to taxes paid three years back or carried forward for twenty years.
What is the applicable headline rate?
- In the UK, the headline rate is a 13% taxable credit for large companies. For SMEs, there is an additional deduction of 33-46% of qualifying expenditure.
- In Ireland, the headline rate is a 25% tax credit on qualifying expenditure.
- When it comes to Canada, the headline rate becomes more complex. It includes:
- 35% Federal credits for Canadian Controlled Private Corporations, and 15% for all other corporations.
- 35 – 20% provincial credits depending on the province.
- Salaried employee costs are increased by 55% as a proxy to overhead costs, or R&D specific overhead costs can be claimed using the traditional method.
- The effect of the rates results in a Research & Experimental Development (SR&ED) credit of up to 65% for Canadian Controlled Private Corporations, and up to potentially 27% for all other corporations (depending on province).
So, what is the registration or claim process?
In the UK, claims are made within the corporation tax return. The R&D incentive must be claimed within two years of the end of the accounting period of the expenditure. This can be done in the original corporation tax return or by amendment to the return within the time limits. Claims are examined by the UK tax authorities, but without being subject to separate scientific review. It is generally desirable to involve the company’s own competent technology professionals in the R&D identification.
Similarly in Ireland, claims are made within the corporation tax return. A claim must be made within 12 months of the accounting period in which the expenditure was incurred. The claim can be made on filing the return (due no later the nine months after the year-end) or alternatively by an amended return filed within the 12-month period. Claims are reviewed by the tax authority on a frequent basis where the credit claim has triggered a payable credit.
Finally, in Canada claims are made in the company’s corporation tax return. The submission must be made within 18 months of the taxation year end of the company. From 2012, the Canadian tax authority began increasing the number of audits. In 2021, over 40% of claims were audited.
If you have any questions around the insights shared in this article, please contact us.
If you missed the first instalment in this R&D and innovation tax credits series, you can read it here.