R&D Tax Credits; a missed opportunity & COVID-19 concession updates

It is interesting to note that the number of companies making R&D tax credit claims over the past 5 years has been steady; between 1,500 to 1,600 each year. However, when we compare the number of R&D tax credit claims to total population, we find that Ireland appears to have a low claim rate when compared to other countries like UK, Netherlands, France, Canada and Australia.

 

Based on our discussion with many companies, we feel there are two main reasons why Irish companies who are eligible to claim, do not:

  • The first reason is that they simply do not know if they qualify. When speaking with companies, they say the rules are too vague and ambiguous; and
  • The second reason is that they have heard Revenue is harsh in their assessment of what constitutes R&D and therefore deny many claims.

 

On the second point, businesses are not wrong. Comparatively speaking, Revenue has a stricter audit assessment of R&D tax credit claims than most countries. The number of audits is higher; the years selected for audit are higher and the amount disallowed is greater (the average reduction per claim has been around €80K per year).

While Revenue may take a closer look at R&D claims, the average SME earns roughly €116K per R&D tax credit claim and a large company earns €1.9M which are much larger than in comparative countries.

So those companies that decide to make an R&D tax credit claim earn lucrative financial returns.

One of the main problems with the system is that no support needs to be filed by a company with the corporate tax return when making an R&D tax credit claim. Therefore, the company must keep on hand sufficient contemporaneous documentation to support the claim should Revenue wish to audit at a later date. We believe this is recipe for disaster for most companies and few companies have the process or discipline to keep contemporaneous R&D tax credit documentation.

But here is the good news. We have teamed up with RDP Associates, who have developed an R&D tax credit process that requires only one person to record R&D activities and costs. The time commitment should be no more than half an hour per month.

Here are some of the best practices for documenting an R&D tax credit project:

  1. Designate one person to be responsible for maintaining documentation for all R&D projects;
  2. Create a system. RDP’s Innovation Connection Program (ICP) is a methodology developed to record R&D using templates, short meetings, checklists and a central database;
  3. Quarterly meetings and R&D questionnaires should identify qualifying R&D projects in 2 minutes;
  4. To ensure all projects, activities and costs are claimed a “maximizer checklist” should be used just prior to submitting the claim;
  5. A project description assessed against the R&D tax credit criteria along with a detailed cost summary should be submitted with the corporate tax return; and
  6. If Revenue decides to audit a claim, mock reviews, coaching and outside assistance should be sought.

 

R&D tax credit claims can significantly improve a company’s cash flow and 80% of companies file a claim each year. If eligible, no company should pass on this tax incentive, it is an entitlement.

Further, done correctly, the process to develop and prepare an R&D tax credit claim should be simple, practical and require little time commitment.

 

COVID 19 CONCESSION UPDATE

Revenue will continue to expedite payments of any instalment of excess R&D tax credit due to be paid in 2021, due to the exceptional circumstances of the COVID-19 pandemic. This is now confirmed on the Revenue website, which previously referred to the expedition of R&D instalments payable in 2020 only. This concession brings forward the payment date provided by section 766 and section 766A TCA 1997.

Requests for Revenue to expedite the payment of any 2021 instalments of excess R&D tax credits should be made through MyEnquiries. To enable payment of the excess credits, the form CT1 for the company’s accounting period ending in 2020 and for accounting periods ending up to March 2021 must, at the time of the request, be submitted.

 

To understand how RSM Ireland in conjunction with RDP Associates can assist companies, please contact Aidan Byrne at [email protected]

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Aidan Byrne
Tax Partner

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