Leyton Ireland - Changes to R&D Tax Credits

Changes to R&D Tax Credits - A missed Opportunity?

05/02/2010

Changes to R&D Tax Credits - A missed Opportunity?

Finance Minister Mr Brian Lenihan today published the Finance Bill 2010 which gives effect to the taxation measures announced in last December’s Budget. The existing R&D Tax Credit regime has been amended to cover situations where a company carries out R&D activities in different facilities in separate geographical locations and the activities in one of these facilities is permanently discontinued.

The Irish R&D Tax Credit operates on an incremental basis. That is, a 25% Corporation Tax credit is available for the amount of current year R&D expenditure that is in excess of R&D expenditure incurred during a base year (2003).

For the purposes of calculating the base year R&D spend, all companies that were members of the group in the base year must be considered, even if they are no longer members of the group in the current year. This presents obvious difficulties in cases where group members that were spending a lot on R&D in 2003 are no longer members of the group. In a period of economic crisis where companies are consolidating or reducing their operations this can often result in a significantly reduced credit or even no credit being available to a company that is already struggling to remain afloat.

The Government appears to have acknowledged the impact of the combined effects of the economic climate and the credit’s incremental basis on the benefits provided by the current R&D Tax Credit system by introducing changes with the Finance Bill.

The Finance Bill introduces a concession for the calculation of the base year in the situation where a company closes down, or ceases to carry on a trade in, one of its “R&D Centres”. This will be available for accounting periods commencing on or after 1 January 2010. The concession provides for the removal of the base year expenditure incurred in the R&D centre (which has ceased to trade) from the base year expenditure of group (or company). This move is welcomed as it acts to prevent the group from retaining the legacy base year expenditure of an R&D centre that is no longer contributing to the group R&D activities. The concession is however subject to a number of claw back provisions.

The provision will be clawed back in the following 4 situations:

1. The relevant R&D centre ceases its original activities but is used for carrying on a trade by a group member company,
2. The R&D activities that are “substantially the same as” the R&D activities carried on in the relevant R&D centre at any time in the 4 years before the centre ceased are carried out by a group member company,
3. In a subsequent period the R&D centre is used for the purposes of carrying on a trade,
4. If within 10 years from the date of cessation of the R&D centre no group members are carrying on a trade which is within the charge to Irish corporation tax.

Among the expected anti avoidance measures the above claw back conditions, particularly the last one, may provide an interesting insight into the current mindset of the Department of Finance especially in relation to the much needed requirement to encourage companies to retain their R&D operations and facilities in Ireland. The impact of this last provision on Irish indigenous groups that cease to trade in these turbulent times may however require some thought.

While the changes are not as predicted and will not dramatically enhance the attractiveness of the R&D Tax Credit to SME’s and Large Companies operating in Ireland, we at, Leyton commend the Minister for Finance for not imposing any new measures which could be perceived as being anti commercial to the many companies who are engaged in R&D activities in Ireland.

However, at a time when the Irish government and in particular the Department of Finance are under extreme fiscal duress to react to the ever reducing tax take from all taxation heads, perhaps this was a missed opportunity to take this legislation to the next level.

Business Consultant at Leyton commented, “Existing legislation in this area is good but at a time when very many of our clients are focused on simply staying in business and meeting payroll obligations each week and month, today’s Finance Bill could and should have provided much needed Government support to reinforce the belief that the government is serious about rewarding these innovative and industry leading companies for choosing to locate in the Irish state.”

Emma Fidgeon-Kavanagh, R&D Tax Credit Financial Expert at Leyton: “The Government appears to have acknowledged the impact of the combined effects of the economic climate and the credit’s incremental basis on the benefits provided by the current R&D Tax Credit system. But this legislative change will in the main only effect companies operating within a corporate group structure, there were many ways that the credit could have been enhanced to benefit a wider spectrum of innovative companies, for example, PRSI set off, or enhancing the payable tax credit.”

Such continued public support by Minister Lenihan and the Government is going to be vital in ensuring that we as a nation do not “leak” existing Irish located high value employment to jurisdictions offering highly competitive bespoke Research & Development legislative solutions.

Click on the icon below to read the Explanatory Memo Finance Bill 2010 issued by the "Department of Finance:"

Explanatory Memo Finance Bill 2010

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