R&D Tax Credit Changes – Finance Bill 2012

1. ‘Key Employee’ Reward Mechanism 
This is a new reward mechanism for key employees who have been involved in the R&D activities of a company which will allow them to effectively receive part of their remuneration tax free.
Principle features of this mechanism are as follows:

• The employee must not be, or have been, a director of the company or be connected to a director of the company
• The employee must not have, or have had, a material interest in the company or be connected to a person who has a material interest
• The employee must perform 75% of their activities “in the conception or creation of new knowledge, products, processes, methods and systems”
• 75% of the emoluments of the employee must qualify for the R&D Tax Credit
• The amount of credit that can be surrendered to key employees is capped at the amount of corporation tax due by the company before taking the R&D Tax Credit into account i.e. the company must be taxpaying
• It is up to the company to decide which employees can avail of this relief and the amount of credit which can be allocated to each employee. The effective rate of tax payable by the employee for a tax year cannot be reduced below 23%. The employee must make a claim to Revenue for a refund of tax paid. Unutilised tax credits which the employee has been allocated can be carried forward by the employee indefinitely until they are used (or until the employee leaves the company)
• To the extent that some or all of the R&D Tax Credit is denied (i.e. following a Revenue audit) the employee may be obliged to repay some/all of the credit claimed against their income tax liability.

By virtue of the fact that a company has to be taxpaying to avail of the reward mechanism, and that the key employees cannot be directors or have a material interest in the company this measure is likely to have greater relevance for multinationals as opposed to SMEs.

2. Introduction of a Volume-Based Regime
The Finance Bill has introduced a volume-based regime i.e. an R&D tax credit for every euro incurred, up to the first €100k of qualifying spend incurred by a company. Companies claiming the R&D Tax Credit will therefore have up to an additional €25,000 per annum of tax credit (effectively cash) available to reinvest. This will be particularly valuable to SMEs.

3. Changes to the Existing Subcontracting Rules
The existing subcontracting rules have been changed whereby a company can now claim an R&D tax credit for outsourced spend based on the greater of the current percentage based limits (outsourced R&D expenditure paid to unconnected third parties/third level institutions restricted to 10%/5% of the company’s in-house spend) or €100K. However, the total amount claimed cannot exceed the qualifying
expenditure incurred by a company itself in the period.
SMEs tend to outsource a greater proportion of their activities as they would not have all of the necessary in-house capabilities required for their R&D activities.
This increase in the outsourced cap will therefore increase the R&D tax credit which can be claimed by SMEs which is likely to be subsequently reinvested in the business.
The legislation has been further amended to require the company to notify the third party provider in writing that it cannot also claim the R&D Tax Credit.
As currently drafted this provision has particularly negative consequences for the third party provider, which is concerning, and will no doubt impact on commercial arrangements between the company and the third party provider.

4. Management and Control of R&D Activities
Expenditure incurred in the managing or control of R&D activities will not qualify for the R&D tax credit unless such activities are carried on by the company itself.

5. Transfer of a Trade – Carried Forward Credits and Buildings
R&D tax credits carried forward can now be transferred intra-group as part of the transfer of a trade (subject to certain conditions).
R&D tax credits can also continue to be claimed on buildings qualifying for the R&D tax credit following a transfer of that building as part of a trade (again subject to certain conditions).

6. EU Grants
While the legislation previously specified that expenditure met by grant assistance from the State would not qualify for the credit, this has now been extended to include grants or other assistance received from the EU or European Economic Area.

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