08 Nov 2017 | 08.20 am
R&D Tax Credits For SMEs
If you get an Enterprise Ireland R&D grant, that's good enough for Revenue
08 Nov 2017 | 08.20 am
Revenue has changed the regulations around R&D tax credits, which might help convince more SMEs to embrace the initiative. Mark O’Sullivan (pictured), Director and Head of R&D Technical Services at BDO Ireland, explains why.
In a positive move, Revenue reissued concessional treatment for R&D tax credits in February 2017. This concessional approach means that Revenue, as a rule, will not seek to challenge the scientific/technical merits of any claim where the following conditions are met:
• An Enterprise Ireland or IDA R&D grant was received in respect of the project.
• The R&D tax credit claimed in any given period is €50,000 or less (this equates to a claim containing less than €200,000 of R&D expenditure)
• The company is an SME.
It has been well documented that the R&D tax credit regime is not being utilised to full affect by SMEs. The Department of Finance Report on Tax Expenditures October 2016 reported that in 2014 only 24% of the repayable credit was paid to firms with fewer than 250 employees.
This regime can be invaluable to SMEs, as it offers companies a 25% tax credit on expenditure on R&D in addition to the 12.5% corporation tax deduction. This 25% credit can be offset against corporation tax liabilities or, alternatively, can be received as a cash refund, subject to certain criteria.
When meeting with SMEs, we often find that they believe the regime is purely a tool to promote Foreign Direct Investment (FDI) in Ireland – this is not the case. While there is no doubt that the regime is a key tool in this respect, its ultimate goal is to support the creation of R&D employment in the country across companies of all sizes.
Furthermore, we have found that SMEs are often uncertain as to whether they can make a claim due to complex scientific/technical qualification criteria associated with the regime.
We believe that this concession could be a vital tool in re-engaging SMEs and providing easier access to the R&D tax credit regime for them. Firstly, this will provide a greater level of certainty to SMEs in making an R&D tax credit claim, as they may be more familiar with the IDA/EI definitions of R&D than the R&D tax credit definitions.
Revenue has stated that the definitions are quite similar, so the IDA/EI definitions can provide SMEs with a good initial guide as to the likely eligibility for the R&D tax credit regime. Secondly, we think this approach clearly illustrates that the policy makers expect that the R&D tax credit regime should be utilised by SMEs, i.e. it is not just geared towards FDI.
In addition to the R&D tax credit regime, it may be possible for SMEs to qualify for the Knowledge Development Box (KDB), a new regime effective from 1 January 2016 that offers an effective tax rate of 6.25% on qualifying profits derived from underlying intellectual property.
The KDB regime is very closely tied to the R&D tax credit regime in terms of scientific/technical qualification and, as such, availing of the R&D tax credit regime is also an extremely useful stepping stone to availing of the KDB.
In summary, we believe the new guidance offered by Revenue, along with ongoing support from your expert advisers, could provide SMEs with significant advantages in terms of:
1) Initial project funding through IDA / EI grants
2) Ongoing monetary support and an ability to further invest in the R&D efforts through the R&D tax credit regime
3) Increasing profits realised post R&D efforts through the KDB regime.
Although these supports can be highly beneficial to SMEs, as with any high-value regimes, it is likely that claims will be subjected to Revenue review. In this regard, we would suggest that it is important for all claimants to ensure that their claims for the R&D tax credit or KDB regimes are conformant with current legislation from all aspects, i.e. financial as well as technical and not just by reference to the points set out above.
A commitment has been made in the Government’s Innovation 2020 Strategy to increase public investment in R&D, and we believe that a large amount of this support will be made accessible through R&D grant funding and the R&D tax credit regime going forward.
Knowledge Development Box (Certification of Inventions) Act 2017
On 26 May 2017, Minister for Jobs, Enterprise and Innovation Mary Mitchell O’Connor announced the commencement of an Act for a certification scheme aimed at inventions developed by SMEs. The scheme comes within the Knowledge Development Box initiative announced in the Finance Act, 2015.
Announcing the scheme the minister said: “This is a good day for innovative SMEs involved in research and development that results in valuable Intellectual Property (IP) assets”.
Under the scheme, SMEs can apply to the Controller of Patents, Designs and Trade Marks for a certificate where they believe that their IP generated as a result of R&D is novel, non-obvious and useful. If granted, the certificate will allow the SME to apply the lower rate of corporation tax of 6.25% to profits arising from the intellectual property assets.
Mitchell O’Connor added: “R&D can be very expensive and time consuming and not all R&D is successful. SMEs that invest in R&D will now be able to benefit from the lower rate of corporation tax if their IP meets the criteria of being novel, non-obvious and useful. The new legislation places SMEs on a par with larger companies by making them for eligible for a lower rate of corporation tax on profits from their IP assets. This Act offers SMEs valuable opportunities to invest in greater levels of R&D.”