Research & Development

General consensus would have us believe that in order to be working in Research and Development we must be scientists, wear white coats and be striving to invent or produce life changing products or services for the greater good of the entire universe. A bit exaggerated, possibly but the definition of what can be termed as research and development is far broader than business people realise and consequently tax credits for research and development are not being claimed due to this lack of awareness.

So what is Research and Development?

Research and development is defined as “systematic, investigative or experimental activities in a field of science or technology, being basic research, applied research or experimental development”

The key provision to be satisfied is that the relevant activity must:

• Seek to achieve scientific or technological advancement
• Involve the resolution of scientific or technological uncertainty

Examination of a claim

When we make a claim for R&D tax credits, both of the following criteria must be satisfied:

• The Science test
• The activities for which credit is claimed are consistent with the statutory definition of research and development activities.
• The Accounting test
• The expenditure claimed is correctly laid out on such activities and identifiable.

Base Cost

R&D Tax credits were introduced in Finance Act 2004. Any R&D incurred prior to this date would make up what is known as the “Base Cost”. If our annual R&D spend was €100,000 per annum prior to Finance Act 2004, then €100,000 would be the company’s base cost. Any R&D in excess of this amount would then be claimable under R&D tax credit rules. For example if we incurred €200,000 relevant expenditure in the 2005 tax period, we could claim 20% (25% as and from 1 January 2009) of the amount in excess of your base cost (€100,000) which would result in a tax credit of €20,000.

What can be classed as Research and Development?

Any of the following activities could potentially be eligible for R&D credit purposes:

• Developing a new product/improving an existing product
• Developing a new process/improving an existing process or system
• Improvements to plant performance/Improving energy efficiency
• Improvements to production output (waste reduction, yield improvement, substitution of raw materials.
• Development of product specifications with customers or suppliers.
• Use of universities or external experts to assist developments in your business
• Process changes to improve environmental or safety performance
• Plant/Product trials either on the production line or on pilot facilities
• Automation of manual processes involving the development of new processes and systems
• Development of new techniques for production, analysis, testing etc.
• Modelling or simulation activities
• Development of solutions to reduce a high number of product returns, due to failure or technical deficiencies.
• Use of new or modified raw materials

Whilst any of the above may lead to a claim for tax credit we must be certain that the activity undertaken has clearly sought to provide additional knowledge or capability that is not already available in the public domain. The relevant company must seek to achieve scientific or technological advancement. Whether you actually succeed or not is not vital to such a claim.

Tax Credits for Information Technology

In our economy, the role of Information Technology has become central in many business functions. Many businesses and firms have undertaken the development of their own internal IT systems (software/hardware) either as part of mainstream development or as part of their effort to improve processes and operations.

If your business can demonstrate an advance that is a departure from conventional knowledge then you may be eligible.

IT development as you are aware requires substantial investment in both time and money. It is therefore not surprising that such development activities require the resolution of technological uncertainties. Within the non-IT sector, software development often focuses on improving current processes and/or improving legacy systems in line with current working practices and legislation. This can create challenges which the IT development teams must overcome by formulating an advanced solution to the specific problem.

If this has occurred in your business, it is likely then that these IT development activities, could be categorised as R&D and may qualify for tax credits.

Potentially eligible IT activities?

• Integration of telephony and voice technologies
• Smartcard interfacing with other devices
• Integration of mobile technologies such as pen-pad or mobile phones
• Improvement of processes and operations
• Automation of manual activities

In all cases it comes down to one key factor, Is the intention to provide technological or scientific advancement or to remove uncertainty or risk.

What records do I need to keep?

Revenue can examine any aspect of a return or claim within four years of the end of the accounting period in which the company has made the return. They may also refer the project to a field expert so as to assess the validity of the science test.

You as the claimant are responsible for keeping proper records which contain sufficient evidence to sustain your claim. These would include:

• Project title and description
• Purpose of the project
• Feasibility plan or methodology adopted
• Status and/or progress reports
• Problems encountered in the course of the project that identified areas of technological uncertainty and experimental development
• Personnel involved in the project
• Notebooks, lab reports, patents, and patent applications

Conclusion

So claiming of tax credits can be of huge benefit to your business, can make significant reductions in your tax liabilities and the key point that you should consider is that it doesn’t have to be successful. Once the intention is to achieve advancement or to remove uncertainty then you are entitled to claim your credit.