R&D Tax Credits 24 April 2012 Leslie Barrett, Tax Partner Eamonn Murphy, Tax Director

1. R&D Tax Credits 24 April 2012Leslie Barrett, Tax PartnerEamonn Murphy, Tax Director

2. Amount of the Credit What is the amount of the credit? • a 25% credit (in addition to the normal tax deduction) on the excess of R&D expenditure over the "threshold amount". • "Threshold Amount" – the level of R&D expenditure in the 12 month accounting period ending in 2003 (post Finance Act 2012, the threshold amount doesn’t apply to the first €100k – see formula below) • example: €150,000 in 2003, €550,000 in 2010. Credit of €100,000 + (€550,000 - €150,000) = €500,000* X 25% = €125,000. *Capped at actual spend. • points of note: high spending in 2003 penalised, the credit was 20% for periods which commenced before 1/1/2009.

3. How can the credit be used? • in the year in which it arises it firstly goes against the current year CT liability. • any excess can be carried back against the prior year liability. • any remaining excess can be refundable (subject to a cap) in 3 instalments. • 33% of the excess (not earlier than the following 21 September – which is the CT return filing deadline if we assume a 31/12 year end). • if the excess carried forward is not fully used against the next year's CT liability then half of the remaining excess is refunded (not earlier than 12 months after the filing deadline in 1) above). • if the excess carried forward is not fully used against the next year's CT liability (2 years after original claim) then the remaining excess is refunded (not earlier than 24 months after the filing deadline in 1) above).

4. Use of the credit - continued • the cap on the refund is set at the greater of: • the CT of the 10 years prior to the year of claim, and • The PAYE, PRSI & levy remitted in respect of employees in the year of claim.* * For accounting periods commencing on or after 22 June 2011, 2) above changes to: the payroll cost of the year of claim and the preceding year, as reduced by the lesser of: (i) the excess of R&D refunds over Payroll Liabilities of the same period & (ii) the payroll liabilities of the previous period. For first time claimants (or if never refunds) this could 'double' the cap.

5. Use of the credit – continued • if a claim for refund is not made (or is capped) the excess credit can be carried forward indefinitely. • current year credits take priority to credits carried forward. • claims (on form CT1) must be made within 12 months of the accounting year end. • post Finance Act 2012, it is now possible to surrender all or part of the credit to a "key employee", being an individual who isn’t a director, holds no more than 5% of the shares, and spends at least 75% of their time on R&D work.

6. What constitutes qualifying expenditure? • tax deductible in Ireland but not elsewhere. • incurred by a trading company (or the company is a 51% subsidiary of such a company). • involving systematic, investigative or experimental activities in a field of science or technology in one of three categories (next slide).

7. Three areas of research • Basic Research – seeking new scientific or technical knowledge, without a specific practical application in view. • Applied Research – seeking such knowledge directed towards a specific practical application. • Experimental Development – drawing on such knowledge to achieve technological advancement being new or improved (even incremental improvement) materials, products, devices, processes or systems.

8. Additional requirement to qualify • The activities will not be R&D activities unless they: • seek to achieve scientific or technological advancement, and • involve the resolution of scientific or technological uncertainty (though need not succeed). • no R&D credit for "old hat". Academics engaged by Revenue to judge whether genuine advancement.

9. Fields of science which qualify • natural sciences – maths, computer science, software, physics, chemistry, earth & biology, etc. • engineering & technology – civil, electrical, food etc. • medical • agricultural

10. Activities which don’t qualify • research in sciences other than those specified (e.g. economics). • routine testing, e.g. quality control • alterations of a cosmetic or stylistic nature (even if yielding some improvement). Issue for computer software. • market research etc. • commercial & financial steps connected with new or improved products, processes, materials. • corrective actions regarding production breakdowns.

11. Record keeping • Two tests: • Science Test – records to show that the work falls within the criteria specified. • Accounting Test – records to show that the quantum of expenditure claimed is correct. The relevant portion of overheads can be claimed. • See handout – 13 Key Requirements. • In summary need to demonstrate scientific rigour.

12. Miscellaneous R&D Credit issues • in group situations (51% subs), the expenditure (giving the credit) can be allocated as required throughout the group. The group expenditure is also counted in establishing the 2003 threshold amount. • royalty expenditure only allowable if at arms length. • amounts paid to a University for R&D can qualify for the credit but only up to 5% of the total qualifying R&D expenditure (10% if non-Uni and not connected person) – post Finance Act 2012 the first €100k is not subject to these percentage restrictions. • relief for capital expenditure on R&D buildings (in addition to capital allowances) – no base year. Mixed use building must be at least 35% used for R&D, but claim only to extent of R&D use. 10 year clawback if sold or ceases to be used for R&D. Same level of credit and use of credit.

13. R&D Tax Credits • Thank You. • Any Questions?

14. R&D Tax Credits Important Information This briefing is provided for general information purposes only and is not a comprehensive or complete statement of the issues it relates to. It should not be used as a substitute for advice on individual cases. Before acting or refraining from acting in particular circumstances, specialist advice should always be obtained. No liability can be accepted by Grant Thornton or Grant Thornton Financial & Taxation Consultants Limited for any loss occasioned to any person acting or refraining from acting as a result of any material in this briefing. Grant Thornton is authorised by the Institute of Chartered Accountants in Ireland to carry on investment business.