R&D - EY · PDF file10 Agenda The R&D incentive in the current environment Overview of the R&D regime The science test The accounting test Overview of documentation

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R&DTax Incentives

An IDA Perspective onResearch & Development

Leo Clancy, 10th September 2014

Supporting IndigenousIrish Companies

Building IrishAcademic Base

Supporting MultinationalCompanies in Ireland

Department of Jobs, Enterprise & Innovation

Where does IDA Fit?

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Information Communication

Technology

Life Sciences & Food

Engineering, Industrial &

Clean Industries

Content Industry, Consumer& Business Services

International Financial

Services

IDA Ireland Business Focus

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Research, Development& Innovation

High ValueManufacturing

Global Business Services

Why is R&D Important?

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Agency Supported Foreign OwnedCompanies…..

• …….directly employed 172,326, and a further estimated

124,000 indirectly in 2013

• …….contributed 72 percent to total corporation tax revenues

in 2012

• …….spent €13.2 billion on materials and services sourced in

Ireland (2012)

• …….invested just under €1.4 billion in R&D (2012) equating to

over 70 percent of all business expenditure on R&D

Source: Policy Statement on Foreign Direct Investment in Ireland, July 2014 5

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IDA Ireland’s Core Value Proposition

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R&D Tax Credit

Source: Department of Finance, Review of R&D Tax Credit 2013 7

2004 2011

Business Expenditure on R&D €1.2bn €1.86bn

Tax Credit Paid €70.5M €261M

# of Beneficiaries 75 ~1,500

Direct State R&D Spending & Related Support

Source: State Investment in Research & Development, Forfás, November 2013 8

– Academic Infrastructure– SFI & Technology Centres

– Innovation Partnerships

– Feasibility Studies

– Enterprise R&D Grants– Innovation Vouchers

– Commercialisation Fund

– Fellowships (IRC / SFI)– Horizon 2020 Supports

– SFI Spokes & Partnerships

– ….and others

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Direct State Investment in R&D, 2004 to 2013

Source: State Investment in Research & Development, Forfás, November 2013 9

In-house R&D Spend and Employment(IDA Client Companies)

0

200

400

600

800

1,000

1,200

1,400

0

2,000

4,000

6,000

8,000

10,000

12,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total R&D Employment (LHS) Total R&D in-house Expenditure €m.

Some Simple Ambitions for Irish R&D

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Sustainable Economic Impact

Reputation for Delivering Research Excellence

Local Development & Commercialisation

Increased Collaboration & Connections

More R&D (Volume & Participants)

5

To learn more log on to idaireland.com+353 1 603 [email protected]

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7

8

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Optimising your R&Dincentives10 September, 2014

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Agenda

► The R&D incentive in the current environment► Overview of the R&D regime► The science test► The accounting test► Overview of documentation requirements► Putting a framework in place► How to prepare for a Revenue audit

10 September 2014 Optimising your R&D incentivesPage 27

The R&D incentivein the currentenvironment

The R&D incentive in the current environment

Key improvements in recent years:► Cash refunds for excess R&D credits from Irish Revenue► 1st €100K/€200K/€300K on a volume basis► Use credit to reward key R&D employeesVery successful regime:► Encouraging growth in R&D spend in Ireland

► 2003 R&D spend was 0.78% of GDP increasing to 1.17% of GDP (2011)► The EU 2020 target for Ireland is 2.5% of GDP

► Greater flexibility around refundsDepartment of Finance Review publishedOctober 2013► Government’s commitment to maintain the► R&D tax credit► Among ‘best in class’ internationally


The R&D tax credit regime isa fundamental cornerstone tobuilding Ireland as a costcompetitive knowledgeeconomy

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The R&D incentive in the current environment


► 25% Credit available on qualifyingincremental R&D expenditure

► Allowable against Irish corporation tax► Where excess credit is available the

excess will be refunded per below

► 25% Credit available on qualifyingincremental R&D expenditure

► Available as Cash Refund► Refunded over three years

Company isprofitable andpaying Irishtax

Company inlosses anddeclares NilIrish tax

The R&D incentive in the current environmentExample of tax credit/cash refunds


Repayment of the excess R&D tax credit of €400,000 is as follows:

Excess R&D tax creditpayable no earlier than

1st Instalment (33%) €132,000 23 September 2014

2nd Instalment (50% of balance) €134,000 23 September 2015

3rd Instalment (remainder) €134,000 23 September 2016

Corporation Tax liability y/e 31 December 2013 €100,000R&D tax credit €500,000Excess R&D tax credit – available for repayment €400,000

The R&D incentive in the current environmentExample of tax credit/cash refunds (cont’d)


31 Dec2013

31 Dec2014

31 Dec2015

Excess R&D tax credit –for repayment €400,000 €400,000 €400,000

R&D tax credit not repayable beforeR&D TaxCredit

Total Due 23 Sept2014

23 Sept2015

23 Sept2016

23 Sept2017

23 Sept2018

FY13 €400,000 €132,000 €134,000 €134,000

FY14 €400,000 €132,000 €134,000 €134,000

FY15 €400,000 €132,000 €134,000 €134,000

Total €1,200,000 €132,000 €266,000 €400,000 €268,000 €134,000

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Overview of R&Dregime

Overview of R&D regimeKey highlights

► Qualifying R&D project with 20% grant aid:

► Significantly reduces net cost of doing R&D in Ireland► Accelerate investment – provide a budget to pay for targeted hires► Increase ROI on R&D spend► Increase margins on qualifying projects► Can account for the R&D tax credit above the profit line


R&D spend of 100

Grant aid (20)

Net of grant aid 80

CT deduction @ 12.5% (10)

R&D credit @ 25% (20) (30)

Net cost 50

Overview of R&D regimeKey highlights (cont’d)

Credit in addition to corporation tax deduction► 37.5% tax relief on net of grant expenditure

How is relief obtained:► Credit to be offset against current year corporation tax liability

► Excess R&D tax credits can be carried back and offset against corporation tax paidin the previous year

► Claimed on corporation tax return► Cash refunds for excess credits► Claims must be made within 12► months of the period end


The introduction of a cashrefund scheme can offersignificant cashflow andfinancial statement benefits

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Overview of R&D regimeKey highlights (cont’d)

► Limits on subcontracting costs capped at the greater of:► Up to 5% (University or Institute of higher education) and 10%/15% of qualifying in-

house R&D spend where subcontracted to an unconnected third party respectively,or

► €100,000► For 2012 onwards, onus on principal to claim the R&D benefit and notify

subcontractor in writing► Insert clause in contract terms► Letter of notification etc.► Form CT1 panel to be completed


Always bear in mind the25% incentive whennegotiating with R&Dsubcontractors

Overview of R&D regimeKey employee


KeyEmployee

Must be50%

involved inR&D

Cannot bedirector orconnectedto director

Cannothave >5%

shareholding

Effectiveincome taxrate cannot

be <23%

Capped atcorporationtax liability

Claw-backprovisions

Pooruptake

Overview of R&D regimeKey Finance Act (No.2) 2013 changes

► Increase volume base credit from €200K to €300K► Outsourcing limits for unconnected third parties increased from 10% 15%► Key employee – claw back provisions onus now on the company


Pre Finance Act(No.2) 2013

€

Post Finance Act(No.2) 2013

€Difference

€

In-house R&D expenditure 1,500,000 1,500,000 Nil

Subcontracted R&D expenditure*(10%)/(15%)

150,000 225,000 75,000

Base Year R&D expenditure 2003*(€200K/€300K volume basis)

(100,000) (0) 100,000

Qualifying R&D spend 1,550,000 1,725,000 175,000R&D tax credit 387,500 431,250 43,750

*Subcontracted expenditure €300,000 Base Year expenditure €300,000

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Science test

Science test5 Tests

► R&D activities means:1. Systematic, investigative or experimental activities2. In a field of science or technology3. Being one or more of the following categories of R&D:


It’s not just people in whitecoats in labs that qualify!

Basic Research (experimental/theoretical work without aspecific objective)

Applied Research (work undertaken for a specificobjective) or

Experimental Development (producingnew/improving existing, materials, products,devices, processes, systems or services includingincremental improvements thereto)

Science test5 Tests (cont’d)


Activities which seek to achievean advance in science ortechnology

The solution, or method ofarriving at the solution is notreadily apparent to anappropriate skilled competentprofessional

Scientific or technologicaluncertainty

Scientific or technologicaladvancement

4. 5.

AND

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Science TestIs your company doing R&D?

Are you involved in any of theseand were faced with

unknowns/uncertainties that couldonly be resolved through

experimental development?

Development ofnew products,

systems,equipment,processes

Automation ofmanual

processes whichinvolved

significanttechnological

uncertainty

Processimprovements,e.g., Increasedefficiency, cost

savings,improved

throughput, etc

TechnicalfailuresScale-up

experimentaltrials on theprocessing

lines

Change ofproduct materialinput – effects

onbiocompatibility,

durability,consistency etc

Use ofuniversities/external

experts that havespecialisedknowledge

Developmentof Proof ofConcepts,

prototypes,etc


Accounting test

Accounting test

“expenditure incurred by the companywholly and exclusively in the carryingon by it of R&D activities..”

► Staff costs and overheads directlyattributable to R&D activities,including:► Salaries of R&D personnel► Direct costs

► Plant and machinery► Third party royalties


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Accounting testExamples of some eligible costs


Direct staff costs

RawMaterials/Consu

mables

Directoverheads

Fixtures andFittings

Buildings(special rules

apply)

Sub-contractedR&D costs

(rules)

Plant andmachinery

Computersoftware and

hardware costs Light

N.B., Any tax allowable expense incurred in the carrying on of qualifying R&D activities of the claimant.

Heat

Rent

Rates

Accounting testPlant and machinery

► Claim may include plant andmachinery► Used wholly and exclusively for R&D

Or► Based on the % R&D

usage/economic life of the asset

► Must be entitled to claim capitalallowances

► Prior year review where R&D usageno longer just and reasonable


Accounting testBuildings overview

► 25% credit for current year spend► No base year► Must be entitled to IBAs► Buildings used partly for R&D

activities may qualify on the basisthat at least 35% of the building isused for R&D


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Overview ofdocumentationrequirements

Overview of documentation requirements

► Self assessment► Write up on a project by project basis► Key documentation requirements of Irish Revenue► Satisfy both accounting and science tests


Overview of documentation requirements

► No standard template used byRevenue

► Project reports do not have to besubmitted to Revenue unlessrequested

► 23 Point Revenue Query letter (nextslide)

► Ensure written by ascientist/technologist and not anaccountant

► Bear in mind external expert usedby Revenue


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Overview of documentation requirementsRevenue’s query letter

R&D department:1. The number of projects undertaken?2. Summary of the R&D activities for each project?3. Date the project started?4. Date the project ended (if applicable)?5. Specific scientific/technological advancement sought at the start of the project?6. Specific scientific/technological uncertainty the company sought to resolve at the start of the

project?7. Was the solution already known to a competent professional in the field?8. The field of science/technology involved?9. The type of R&D, being one/more of the following:

► Basic research,► Applied research, or► Experimental development

10. Where did the R&D activities take place?11. If claiming for subcontracting activity, outline the work carried out by those other parties?


Overview of documentation requirementsRevenue’s query letter

Finance/HR department:1. Is the claim in respect of s766 or S766A TCA 1997?2. The amount of the FY2003 base year amount?3. Has all group spend been included in the FY2003 base year?4. Once the uncertainty has been resolved, confirm no further spend attributed to R&D?5. Qualifications of each project leader?6. The number of staff employed in R&D activities?7. Quantify expenditure paid to a third party contractor/service provider?8. Quantify expenditure paid to a university/institute?9. Where spend allocated to R&D by apportionment, detail the basis and method used?10. If claim includes P&M, state the % used in R&D over the useful economic life of the asset?11. Details of any grants received in respect of R&D?12. Computation of tax credit claimed for the accounting period, showing itemised analysis of

each expenditure item?

Putting a framework inplace

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Putting a framework in placeAnnual process


Identify► Identify your target projects within your business► Identify and categorise the project staff► Articulate the scientific/technological advancement and uncertainty present in the project► Consider concise front-end assessment

Quantify► Determine which activities have contributed to the scientific/technological advancement and

scientific/technological uncertainty► Understand how the project staff have contributed to the qualifying activities by individual or

role► Allocate qualifying percentages to staff/roles

Substantiate► Finalise project write ups► Leverage existing internal company documentation including grant claims/patent

applications, etc.

Identify Quantity Substantiate

Putting a framework in placePractical challenges


► Identification of qualifying R&Dprojects

► Time apportionment► Interaction between R&D and

finance teams► Completion of technical

documentation► Costs directly supporting R&D

activities

How to prepare for aRevenue audit

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How to prepare for a Revenue auditEconomic situation

► Increase in the number of claims forcash from Revenue

► Significant increase in the level ofqueries from Revenue

► R&D tax credit highly visible► High risk area► Many Revenue audits yield

settlements► Failing on the science test► Failing on the accounting test


Rev

enue

Aud

its

Cash refunds

How to prepare for a Revenue auditTypes of R&D audits

Financial and tax audit► Revenue will not appoint an expert

to review the science test (at thispoint!)

► Will focus on the accounting test► Qualifying expenditure


Scientific audit► Revenue will appoint a technical

expert► Due diligence by the company first► Non-disclosure agreement signed

between Revenue and the expert► Usually focus on the science test

and the accounting test


How to prepare for a Revenue auditFactors influencing audit selection?

RevenueAudit

IndustrySector

Size of theR&D claim

Cashrepayment

vs. taxpaying

Complianttax payer

Trackrecord with

Revenue

DistrictProject

Responsesto RevenueQuery Letter

RandomSelection

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Companies are required to maintain and record source documentation tosatisfy the science test.Should be maintained contemporaneously.

Technical documentation:► Eligible activities overlooked► Activities don’t meet the technical criteria► Company cannot identify project parameters► When did the R&D project activities commence and cease?► Poor presentation on site visit/lack of quality information► Not maintaining sufficient documentation► Not being briefed by technical people► Poorly prepared

How to prepare for a Revenue auditCommon pitfalls - science test


Fail to prepare,prepare to fail!

How to prepare for a Revenue auditCommon pitfalls - accounting test

Companies are required to maintain and record source documentation tosatisfy the accounting test.Should be maintained contemporaneously.

Financial documentation:► Base year incorrectly calculated/unsupported

due to insufficient documentation► Over allocation of costs► Inclusion of non qualifying expenditure► Not tax deductible (e.g. depreciation)► Relates to R&D activities not carried on in the EEA► Incorrect apportionments being used for salaries/

overheads/plant and machinery► Not apportioning costs for commencement/► cessation of R&D projects► Allocation methodology unsupportable




How to prepare for a Revenue auditCommon pitfalls - accounting test (cont’d)

Companies are required to maintain and record source documentation tosatisfy the accounting test.Should be maintained contemporaneously.

Financial documentation:► No amendment of plant and machinery

for usage test► Capital expenditure does not qualify for

capital allowances► Incorrect treatment of subcontracted costs and agency staff► Incorrect treatment of grants► 12 month deadline is missed► Order of offsets not applied correctly► Refundable credit not appropriately capped



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How to prepare for a Revenue auditThe process

► Main concerns – cost and reputation► Code of Practice

► 21 days notice of audit► 14 days issue notice of intention to make qualifying disclosure► Qualifying disclosure mitigates penalties and avoids publication and the risk of

prosecution.

► Financial and/or technical review► Audits can be lengthy and costly process


Agree technicalassessor and date

of audit

AuditNotification

RevenueAudit

TechnicalAssessor’s and

Revenue’sassessment

CompanyAppeal?

Months years?21 days orto be agreed

How to prepare for a Revenue auditSite visit presentations


Company overview

Science presentation

Accounting presentation

Source records

How to prepare for a Revenue auditScientific source documentation – some examples


Developer’sJournals/LabNotebooks

Project PlansTest Results

DefectTrackingRecords

Logs andcomments

from controlsystems

Design ReviewMinutes EmailsTest Plans

Status/ProgressReports

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How to prepare for a Revenue AuditFinancial source documentation – some examples


P35 records

P&L

Apportionmentmethodology

used

Fixed assetregister

Corporation taxreturn and

computationsGrant

documentation

Invoices

Base yeardocumentation

Third partycontracts

Financialrecords

How EY can help

How EY can help


In houseR&D

workshops

Revenueaudit

supportFeasibility

study

Preparetechnicalprojectreports

CalculateR&D

expenditureConducttechnical

interviews

How wecan help

R&D grantassistance

Developoptimalclaims

methodology

Mockaudits

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Contact details

Ian CollinsHead of R&D Tax ServicesTel: +353 1 221 2638Email: [email protected]


Thank you

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Documents

R&D - EY · PDF file10 Agenda The R&D incentive in the current environment Overview of the R&D regime The science test The accounting test Overview of documentation