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Finance Bill 2010 - Synopsis of R&D Tax Credit Changes
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- 08/02/2010
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Finance Bill 2010 - Synopsis of R&D Tax Credit Changes
On Thursday, 04 February 2010, Finance Minister Mr Brian Lenihan published the Finance Bill 2010 which gives effect to the taxation measures announced in last December’s Budget.
Slight amendments to the R&D Tax Credit regime have been introduced; please find a synopsis of these changes below.
- 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”.
- The concession provides for the removal of base year expenditure incurred in the R&D centre (which has ceased to trade) from the base year expenditure of the group (or company)
- This will be available for accounting periods commencing on or after 1 January 2010.
- The finance bill also clarifies matters relating to the treatment of pre-trading R&D spend.Section 50 Amendments:
1. Situations where a company carries out R&D activities in different facilities
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.
The Finance Bill states that where a group of companies carrying out R&D activities in different research and development centres in separate geographical locations (not less than 20 kms apart) and subsequently ceases to use one of those centres for the purposes of a trade, the expenditure on R&D activities in respect of that centre may be excluded in the calculation of the base year expenditure of the group. This acts to increase the amount of incremental expenditure upon which the group’s R&D Tax Credit is based.
However this concession is subject to a number of claw back provisions. The provision will be clawed back in the following 4 situations:
- The relevant R&D centre ceases its original activities but is used for carrying on a trade by a group member company,
- 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,
- In a subsequent period the R&D centre is used for the purposes of carrying on a trade,
- 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.2. Treatment of pre trading R&D expenditure
Other changes introduced by the Finance Bill in relation to the R&D Tax Credit act to clarify the treatment of pre-trading R&D expenditure in light of the 12 month time restriction for claims introduced by Finance Act (2) 2008.
One of the key requirements for entitlement to claim the credit is that a company must be trading (or is a member of a trading group). However, the legislation contains a provision to take account of the fact that companies often incur expenditure on R&D activities prior to commencing trading. In such a case the expenditure is calculated as if the company was trading but is not available to be used as a credit until the company actually starts to trade.
Finance Act (2) 2008 introduced the requirement to claim for an R&D Tax Credit within 12 months of the end of the accounting period in which R&D expenditure was incurred. This presented problems with the ability to claim a credit for expenditure which was incurred more than 12 months ago (i.e. say a company carried on R&D for 3 years before it started to trade).
The new Finance Bill has clarified matters by saying that if a company spent money on R&D before they started to trade it will be treated as though it was spent during the first year of trading. Thus removing any doubt as to whether a company can claim for this type of spend.
For further detail, and to read Leyton’s commentary on these Finance Bill changes, click here
