R&D tax credits

What you can claim and how the R&D credit is paid: offset against tax or cash instalments

By McManus McCabe Chartered Accountants

Once you know your work qualifies for the R&D tax credit, two practical questions follow: what costs can you actually include, and how does the money reach you? These matter enormously, because the R&D credit is unusually generous in that it can be paid to you in cash even if you have little or no corporation tax to offset it against. For a growing or loss-making company investing heavily in development, that cash can be the difference the credit is designed to make.

This guide explains the categories of expenditure that count, how the credit is calculated in principle, and the mechanism by which it is paid, whether offset against tax or received as cash instalments. It focuses on the mechanics and the cashflow, which is where the real value shows.

What expenditure can be included

The credit is based on your qualifying R&D expenditure, and getting the cost base right is as important as establishing that the work qualifies. The main categories generally include:

• 1
  Staff costs: the portion of salaries, and related employer costs, for the people actually carrying out the qualifying R&D, apportioned for the time they spend on it.
• 2
  Materials and consumables: items used up or transformed in the R&D process.
• 3
  Overheads: a proportion of certain overheads attributable to the R&D activity.
• 4
  Outsourced and third-party costs: qualifying payments to subcontractors and to universities or institutes, subject to the limits Revenue sets.
• 5
  Plant and machinery: qualifying capital expenditure used for the R&D, under the applicable rules.

Apportionment is where care is needed: staff who split their time between R&D and other work can only have the R&D portion included, and that split must be reasonable and supported. Overstating the cost base is a common reason claims are reduced on review.

How the credit is calculated in principle

The credit is a percentage of the qualifying expenditure identified above, at the rate set in the Finance Acts. Because that rate is fixed by legislation and has changed over time, the sensible approach is to establish your qualifying cost base carefully and apply the current rate confirmed with Revenue, rather than rely on a figure that may be out of date. What does not change is the principle: the more accurately and completely you capture genuine qualifying expenditure, the larger and more defensible the credit.

How the credit is paid, and why it matters

This is the part that surprises people, and it is the most valuable feature of the regime. The R&D credit does not simply reduce your tax bill and stop there:

• 1
  First, the credit is offset against your corporation tax liability, reducing what you owe.
• 2
  Where the credit exceeds the tax you can offset it against, the excess is payable to you, not lost. This is what makes it a genuine funding mechanism, not just a tax reduction.
• 3
  That payable element is generally made in cash instalments over a period rather than all at once, under the rules Revenue applies.

Planning around the credit

Because the credit can be a cash receipt paid over time, it is worth planning for rather than treating as an afterthought at year end. Knowing roughly what your qualifying expenditure and therefore your credit are likely to be lets you factor the cash into forecasts, and keeping the cost base well documented through the year makes the claim faster and more robust. The records that support the claim are the subject of a separate guide.

McManus McCabe, chartered accountants with long experience of Irish corporate tax, can help you build the cost base correctly, calculate the credit at the current rate, and plan around how and when it is paid. See our tax compliance and consultancy service and talk to us about your R&D expenditure.

Frequently asked questions

• What costs can I include in an R&D tax credit claim?

  Generally the staff costs of people doing the R&D (apportioned for their R&D time), materials and consumables used up in it, a proportion of certain overheads, qualifying payments to subcontractors and universities within limits, and qualifying plant and machinery. Apportioning staff time reasonably and supporting it is essential, as overstating the cost base is a common reason claims are reduced.
• How is the R&D tax credit paid?

  It first offsets your corporation tax. Where the credit exceeds the tax available to offset, the excess is payable to you in cash, generally over a number of instalments under Revenue’s rules. This is what makes it valuable even to loss-making or early-stage companies with little or no tax to pay.
• Can I get the R&D credit if my company is loss-making?

  Yes. That is one of the most valuable features of the regime. Where you cannot use the credit against corporation tax, the balance is payable to you as cash rather than lost, generally in instalments. For an early-stage company investing in development, this can be a genuine source of funding.
• What rate is the R&D tax credit?

  It is a percentage of qualifying R&D expenditure set in the Finance Acts, and it has changed over time. Because the rate is fixed by legislation and can be updated, establish your qualifying cost base carefully and apply the current rate confirmed with Revenue rather than relying on a figure that may be out of date.

Useful resource

For the current rate, limits and payment rules, see Revenue on how the R&D credit is claimed and paid.