The Budget which was presented on 6th December 2011 contained an outline of proposed amendments to the existing research and development expenditure credit which is available to companies.
Until now, the credit amounted to 25% of the qualifying expenditure on “incremental” research and development during the accounting period. For 2012, the credit, up to a maximum of €100,000, will be allowed against all expenditure. Above €100,000 the incremental basis will still apply. The credit is in addition to the 12.5% corporation tax relief, thus bringing the total tax relief on expenditure up to €100,000 to 37.5%.
Where there are insufficient profits in the current year to absorb the expenditure, the credit may be offset against the prior year’s liability. Any excess which is still unutilised may be carried forward indefinitely against future profits. Alternatively, the unused credit may be repaid over a period of three years.
Where expenditure is sub-contracted outside the company to an unrelated third party, the credit is currently restricted to 10% of total costs, or 5% if sub-contracted to a third-level institution. The Budget proposes to increase this to the greater of 10%/5% respectively, or €100,000. This will assist SMEs in particular, as they are less likely than large companies to have in-house R&D expertise.
It is also proposed to introduce a scheme to facilitate making tax-free payments to company employees. Details are not yet available.
The Finance Bill will contain the proposed legislation to give effect to the measures announced in the Budget. Commentators have suggested that, while the above changes are welcome, we are still behind other countries in our incentives for research based activities. It is suggested that the €100,000 cap should be removed altogether, so that the 2003 base expenditure no longer has to be exceeded before expenditure (in excess of €100,000) qualifies.
Research and development expenditure may seem irrelevant to most entrepreneurs, but the definition includes “systematic, experimental or investigative activities directed at producing new or improved materials, products, devices, process systems or services” can qualify for the tax credit.
It may be worthwhile for company directors to review their activities in the light of this legislation, as the benefits may be considerable. Long & Company will be happy to have an initial meeting to discuss whether your company’s activities include eligible research or development costs, on an obligation-free basis.