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Most of the changes accommodate the OECD Pillar Two GloBE rules and therefore were expected. Some of the practical issues now arising were not foreseen. In this insight, we summarise the new R&D regime and highlight the key practical considerations for companies.
Two new sections were introduced into the Taxes Consolidation Act 1997 (TCA 1997), section 766C (relating to R&D expenditure other than on a building or structure) and section 766D (relating to qualifying R&D expenditure on a building or structure), to apply for accounting periods beginning on or after 1 January 2022. These sections introduce the new regime of payment or offset of the R&D corporation tax credit.
The previous regime, under which R&D tax credits were first used to offset against corporation tax liabilities in the current accounting period and the preceding year followed by three payable instalments, is transitioning to a new three-year fixed payment schedule, that operates as follows:
- The first payable instalment in year one, shall equal the greater of:
- €25,000, (or if lower, the amount of the R&D corporation tax credit,) or
- 50 percent of the amount of the R&D corporation tax credit;
- The second payable instalment in year two, shall be three-fifths of the remaining balance of the R&D corporation tax credit; and
- The last payment in year three shall be the remaining balance of the R&D corporation tax credit in respect of the accounting period, less the sum of the first and second instalment amounts.
A company will have the option to specify whether the R&D corporation tax credit is to be offset against the company’s tax liabilities or is to be paid to the company. The ability to offset against tax liabilities differs to the previous regime, which confined that offset to corporation tax liability only. Under the new regime, the option is there to offset against any tax liability, such as PAYE Employer liabilities or VAT liabilities.
Pre-trading expenditure incurred on qualifying R&D activities can be claimed as a payable R&D credit over a three-year period from the year that the company commences to trade.
The limits on the payable element of the credit do not feature in the new regime.
Transitional measures will be in place for one year, to smooth the transition to the new regime for companies already engaged in R&D activities. These measures permit companies to make a claim under the old regime for accounting periods beginning on or after 1 January 2022 but no later than 31 December 2022.
The transitional rules also permit payable R&D tax credit instalments that are carried forward from accounting periods that commenced before 1 January 2022 (i.e. payable instalments two and three) to be claimed in the accounting period commencing on or after 1 January 2022. This allows instalments carried forward under the old regime to be dealt with in 2022 tax returns.
Companies can claim at least €25,000 of eligible R&D expenditure in the first year, irrespective of the size of the company. This will provide a cash-flow benefit to start-ups, micro and small sized companies, which from the latest available Revenue statistics represent approximately one third of all R&D claimants. This category of claimants, were previously the subject of a targeted provision provided for in Finance Act 2019 that would have increased the tax credit from 25% to 30%. However, that provision has now been repealed on the grounds it was not possible to commence for State Aid reasons.
The ability for pre-trading expenditure to be eligible for cash refunds when the company commences to trade is a positive and will provide vital cash support in the early stage of the R&D cycle. Under the previous regime, it was only permissible to carry forward the credits for offset against corporation tax.
The removal of limits on the payable element of the credit is also welcomed, in that, it removes the administrative burden of reviewing payroll liabilities, corporation tax receipts as reduced by tax credit refunds, to then quantify the payable element of the current refund and the subsequent tracking of the carried forward credits. Medium to large companies that have significant capital investment in R&D, which would exceed their payroll costs, are most likely to benefit.
The new regime appear less beneficial to larger companies whose corporation tax liabilities often exceed their R&D tax credits. Previous practice for such companies was to fully offset their R&D tax credit benefits against their current and previous CT liability, and then if excess/unutilised R&D tax credits remained to then proceed to claim them by way of cash refund instalments.
Under the new regime, the maximum utilisation of tax credits in year one is €25,000 or 50 per cent of the R&D tax credit which can be offset against tax liabilities (corporation tax, VAT or PAYE (Employer) liabilities). If companies opt to treat the first payable instalment as an offset against the corporation tax liability, the amount may be taken into account for preliminary tax purposes.
These new payment rules are timing changes and do not affect the quantum of credit that a company is entitled to claim. Companies with large tax liabilities and large R&D claims, the R&D tax credit benefit is spread over three years, which previously would have taken only one year. There is a timing issue!
There is a one year period to ease into the new regime, which also allows for faster repayment of second and final instalments of previous claims, which is a cash flow advantage. However, what is not clear is the position in respect of carry forward R&D tax credits in respect of expenditure-incurred pre 1 January 2022, which the legislation states can be used to reduce corporation tax only.
We continue to make representations to the Government on the need for clarity in the tax law on the practical considerations highlighted above and other R&D issues.
Contact our R&D specialist team to discuss your research, development and innovation needs and how we can help with your R&D tax credit claim.