R&D Tax Credit

[mandelbrot]

This confuses me. Either the project is an R&D project or it's not, even if it includes some run-of-the-mill tasks. I don't understand the 'apportionment' argument and I haven't heard it raised before by experts on this topic. I hope Revenue aren't trying to move the goalposts on this useful tax credit.

Not as far as I know. If you're a commercial entity your R&D may be carried out with a view to getting a new product on the Market.

In manufacturing industries, which are what I'm most familiar with, the R&D would be in the area of engineering and materials science, and generally once you have a fully functioning prototype which encompasses the resolved scientific/technological uncertainties, then the R&D phase has ended, but the product will not be ready for mass production.

The cost of the plant & equipment used for developing the prototype will be allowable R&D, but if it is then used for production its cost needs to be apportioned to reflect its R&D usage as a % of its total life.

My point is that the question is when does the R&D activity end, and afaik the answer is generally long before you have a product to Market.

 

[T McGibney]

In manufacturing industries, which are what I'm most familiar with, the R&D would be in the area of engineering and materials science, and generally once you have a fully functioning prototype which encompasses the resolved scientific/technological uncertainties, then the R&D phase has ended, but the product will not be ready for mass production.

The cost of the plant & equipment used for developing the prototype will be allowable R&D, but if it is then used for production its cost needs to be apportioned to reflect its R&D usage as a % of its total life.

My point is that the question is when does the R&D activity end, and afaik the answer is generally long before you have a product to Market.

Again, (and apologies for labouring the point), I'm a little confused by this. R&D credit may be claimed in respect of capital expenditure. I don't really see the relevance of restricting this in the case of a prototype machine that is later used in a production process.

 

[Paddy199]

I wonder is there confusion here on accounting for R&D and the tax credit for R&D?

 

[selfassessed]

Not as far as I know. If you're a commercial entity your R&D may be carried out with a view to getting a new product on the Market.

In manufacturing industries, which are what I'm most familiar with, the R&D would be in the area of engineering and materials science, and generally once you have a fully functioning prototype which encompasses the resolved scientific/technological uncertainties, then the R&D phase has ended, but the product will not be ready for mass production.

The cost of the plant & equipment used for developing the prototype will be allowable R&D, but if it is then used for production its cost needs to be apportioned to reflect its R&D usage as a % of its total life.

My point is that the question is when does the R&D activity end, and afaik the answer is generally long before you have a product to Market.

Perhaps that's where the confusion arises. Obviously manufacturing, production and distribution are not R&D activities. But for software these activities often don't exist at all. Copying a CD is about as much manufacturing as gets done and in these days of web distribution that isn't even necessary. Creating the web site is not an R&D activity but creating the application to be hosted there is because on software, the "fully functioning prototype" is the actually finished product?

 

[mandelbrot]

Again, (and apologies for labouring the point), I'm a little confused by this. R&D credit may be claimed in respect of capital expenditure. I don't really see the relevance of restricting this in the case of a prototype machine that is later used in a production process.

Well the capital asset is bought for use over a lengthy period - lets say you decide to buy an expensive piece of equipment that can also be used in your existing production process, but for the first 6 months of it's expected useful life of 10 years you're going to use it primarily for an R&D project.

It would hardly be fair to your competitors that you effectively get a state subsidy amounting to 23.75% of the cost of what is ultimately production equipment rather than R&D equipment.

http://www.revenue.ie/en/tax/ct/leaflets/research-dev.pdf
"Expenditure on research and development, in accordance with S766 TCA 1997, includes expenditure on plant and machinery. However where plant and machinery which is used for R&D and other purposes form part of the claim, the cost of the plant and machinery should be apportioned on a just and reasonable basis.
If an apportionment that has already been made in this manner is later shown not to be “just and reasonable” a revised apportionment must be made. The new apportionment then supersedes the previous apportionment. The revised apportionments may give rise to an underpayment or overpayment of corporation tax."

 

[T McGibney]

Well the capital asset is bought for use over a lengthy period - lets say you decide to buy an expensive piece of equipment that can also be used in your existing production process, but for the first 6 months of it's expected useful life of 10 years you're going to use it primarily for an R&D project.

It would hardly be fair to your competitors that you effectively get a state subsidy amounting to 23.75% of the cost of what is ultimately production equipment rather than R&D equipment.

http://www.revenue.ie/en/tax/ct/leaflets/research-dev.pdf
"Expenditure on research and development, in accordance with S766 TCA 1997, includes expenditure on plant and machinery. However where plant and machinery which is used for R&D and other purposes form part of the claim, the cost of the plant and machinery should be apportioned on a just and reasonable basis.
If an apportionment that has already been made in this manner is later shown not to be “just and reasonable” a revised apportionment must be made. The new apportionment then supersedes the previous apportionment. The revised apportionments may give rise to an underpayment or overpayment of corporation tax."

But we're talking here about developing a prototype, not buying an expensive machine? I don't really see your point in relation to "state subsidy" as the entire raison d'être of the R&D credit in the first instance is to confer a competitive advantage to the recipient.

 

[mandelbrot]

But we're talking here about developing a prototype, not buying an expensive machine? I don't really see your point in relation to "state subsidy" as the entire raison d'être of the R&D credit in the first instance is to confer a competitive advantage to the recipient.

But we're talking here about developing a prototype, not buying an expensive machine? I don't really see your point in relation to "state subsidy" as the entire raison d'être of the R&D credit in the first instance is to confer a competitive advantage to the recipient.

In lots of cases the same P&M can/will be used for the R&D activity as for production - in some cases one of the outcomes of the R&D process is some degree of modification/reconfiguration of P&M for future production.

Not trying to be smart, but I don't really see how you can't really see my point about the state subsidy comment, but I'll try once more to illustrate it: Lets say I've got an expensive production-line machine with a replacement cost of €2m, nearing the end of its useful life. So I decide to buy a new €2m machine, and its first use will be in a genuine R&D project for the next couple of months, and after that it will be used for production for the next ten years, regardless of the outcome of the R&D.

Do you think it's justifiable for the state to give that company nearly €500k back for what is effectively a piece of production equipment? The cost of the couple of months labour and materials in the R&D project would probably be only a small fraction of the cost of the capital asset. To me it seems wholly reasonable and fair that you would only get the R&D credit proportionate to the use of the asset in R&D activities. Your competitive advantage is that you are effectively being subsidised to spend money on R&D, to the extent that the money spent relates to R&D.

 

[T McGibney]

Lets say I've got an expensive production-line machine with a replacement cost of €2m, nearing the end of its useful life. So I decide to buy a new €2m machine, and its first use will be in a genuine R&D project for the next couple of months, and after that it will be used for production for the next ten years, regardless of the outcome of the R&D.

Would such expenditure attract R&D credit in the first instance? If the R&D project is a temporary one, I would have though that this would imperil the allowability of the credit in respect of capital expenditure which would by its nature relate to long-term use.

 

[mandelbrot]

Would such expenditure attract R&D credit in the first instance? If the R&D project is a temporary one, I would have though that this would imperil the allowability of the credit in respect of capital expenditure which would by its nature relate to long-term use.

Ah now that's a horse of a different colour!

Under the legislation I don't see how you could be denied the credit just because the R&D usage of the capital asset was for a relatively short duration.