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.

 

[Purple]

I'm resurrecting an old thread rather than starting a new one.

Has anyone been audited by revenue for R&D tax credits?

 

[RainyDayFund]

Has anyone been audited by revenue for R&D tax credits?

Yes, audits most certainly do happen. Revenue interventions are a standard part of the tax compliance cycle, and their frequency has reportedly increased in recent years

In the context of corporate tax matters, there is no "upside" to public disclosure. I would suggest to anyone who has been audited, regardless of outcome or personal experience, to not disclose this on a public forum.

If anyone is genuinely concerned about their own tax position, the only responsible advice is to direct them to professional tax advisors and/or specialist R&D tax credit advisors.

 

[Clamball]

I don’t work on the finance side of the business but the science side. We were audited and it was very straightforward from my point of view. Can we see this invoice, can we see that invoice, can you show the science reports. But whether your research meets the science test can be a matter of interpretation on both sides, it can go either way. Audits are a normal part of business and revenue will want to assure themselves that you applied the legislation correctly.

 

[Purple]

Yes, audits most certainly do happen. Revenue interventions are a standard part of the tax compliance cycle, and their frequency has reportedly increased in recent years

We've been audited a good few times over the years, resulting in a clean bill of health or a refund, but they haven't looked specifically at our R&D Credit claim.

In the context of corporate tax matters, there is no "upside" to public disclosure. I would suggest to anyone who has been audited, regardless of outcome or personal experience, to not disclose this on a public forum.

What's the downside? They are very reasonable and fair.

If anyone is genuinely concerned about their own tax position, the only responsible advice is to direct them to professional tax advisors and/or specialist R&D tax credit advisors.

That's not the question I was asking.

 

[RainyDayFund]

We've been audited a good few times over the years, resulting in a clean bill of health or a refund, but they haven't looked specifically at our R&D Credit claim.

You could get a financial audit, or both a financial and science audit. I'd wager they are very common, especially for the R&D Tax Credit -- which is ultimately a good thing to keep compliance tight, and protect the public purse.

What's the downside? They are very reasonable and fair.

Revenue indeed are reasonable and fair. The downside of an audit is the resource drain, potential clawbacks, and the high burden of proof on the taxpayer. There are rarely upsides to being audited.

But, as mentioned, it is indeed a normal part of business and one should expect it and expect to deal with it professionally and competently. This is the reason I was advocating for specialist advice. In fact, depending on one's circumstances, it may be worth engaging a tax solicitor as opposed to a general tax expert.

While a general tax expert is your primary resource for "how to comply" or "how to structure", a tax solicitor's role is "how to defend your position" and ensure your strategy survives legal scrutiny - ideally before your filing. Several sophisticated Irish firms now combine these roles to provide a single, comprehensive service.

That's not the question I was asking.

Fair enough. I was simply highlighting to anyone answering your post that discussing specific corporate tax histories on a public forum potentially carries risk for them.

For anyone who may be anticipating an R&D dispute with Revenue, engaging a tax solicitor allows them to place their legal strategy and supporting advice under the umbrella of legal professional privilege.

 

[Purple]

While a general tax expert is your primary resource for "how to comply" or "how to structure", a tax solicitor's role is "how to defend your position" and ensure your strategy survives legal scrutiny - ideally before your filing. Several sophisticated Irish firms now combine these roles to provide a single, comprehensive service.

In my experience the advice given by solicitors in business scenarios is so qualified and ass-covering as to be almost useless. That has included advice on clear points of employment law (when they were factually incorrect) and on Patent applications (when they gave no advice beyond an hour of stories and anecdotes and sent me a bill for €4,200).

When we started down this path I engaged a specialist company to help with all aspects of our R&D tax credit applications. They are excellent and are subject matter experts but not solicitors. The Credits apply to all sorts of R&D, not just hard science.

My question was only in relation to the likelihood of an audit being carried out.

The downside of an audit is the resource drain, potential clawbacks, and the high burden of proof on the taxpayer. There are rarely upsides to being audited.

Just show them what they want and answer their questions honestly. It takes a couple of days.

Don't do things that you think might not be tax compliant then an audit is not a big deal and it's not resource intensive.

 

[RainyDayFund]

Just show them what they want and answer their questions honestly. It takes a couple of days.

I think you'll find your mileage may vary on this one.

 

[Purple]

I think you'll find your mileage may vary on this one.

We claim the lowest of the Civil Service rates. No company cars, no perks, no "team building" etc. It wouldn't matter if they stayed for a month, we have literally nothing to hide.

 

[RainyDayFund]

We claim the lowest of the Civil Service rates. No company cars, no perks, no "team building" etc. It wouldn't matter if they stayed for a month, we have literally nothing to hide.

I'm not suggesting you have anything whatsoever to hide, just that the imposition and effort for one to prepare for an audit can be substantial.

 

[Purple]

I'm not suggesting you have anything whatsoever to hide, just that the imposition and effort for one to prepare for an audit can be substantial.

We give them an office and access to coffee and the canteen. Then we give them access to our accounts and answer they question. A relatively painless few days.

 

[RainyDayFund]

We give them an office and access to coffee and the canteen. Then we give them access to our accounts and answer they question. A relatively painless few days

Glad it was painless for you guys. However, your experience may be typical or atypical but it will not be universal.

The pain is probably dependent on size of operation (more of a business inpact for smaller outfits/self-employed) and the size and scope of the audit.

For some, I'm sure audit preparation results in foregoing commercial opportunities.