Innovation is key to the survival of any business, never more so than during a recession. This applies as much to companies in the financial services sector as to any other. Encouragingly, a recent KPMG survey found that 63% of companies feel the recession has made Irish companies more innovative. Furthermore, 82% of companies are either currently innovative or planning to innovate.
However, making the leap from planning to innovative to actually doing so can be daunting for a company, particularly in uncertain economic times. While the availability of qualified in-house personnel is the biggest impetus for making this leap, financial incentives and supports are repeatedly called out as highly significant to the innovation process – 87% deem access to funding to be important to the successful completion of an innovation project.
To encourage companies in all sectors to innovate, the Irish Government provides a valuable incentive in the form of the R&D tax credit to all companies undertaking qualifying R&D, regardless of the industry in which they operate (provided they meet certain conditions). The regime enables companies to claim a tax credit worth up to 25% of incremental qualifying expenditure on an R&D project – that’s €25 for every €100 spent. The credit can either be offset against corporation tax or, in cases where the company is loss-making, can be received as a cash payment from Revenue in three instalments (subject to conditions).
R&D in financial services
Innovation is not just about laboratories and white coats – innovation and R&D can occur in many sectors outside the traditional life sciences sectors, including financial services. Companies in the financial services sector can undertake a wide range of qualifying activities, including:
- The development of a new fast trading system
- The development of new communication protocols
- Internet security and content delivery
- Advanced mathematical modelling
- The development software systems to meet new reporting requirements
- The development of an intranet platform using cloud technology
- The development of enhanced security solutions.
R&D tax credit overview
The R&D tax credit was first introduced in 2004, and since then has been amended and generally enhanced with each subsequent Finance Act. The credit entitles any company carrying out qualifying R&D activities to a 25% tax credit, which is available in addition to the trading deduction available for R&D spend; for a 12.5% taxpayer, this can result in a net subsidy of 37.5% (i.e.12.5% corporation tax deduction + 25% R&D tax credit).
As mentioned above, in certain cases can be paid as a cash refund, subject to specific conditions. The amount payable under the cash back mechanism is limited to the corporation tax paid by the company in the 10 years prior to the previous accounting period, or the sum of the payroll tax liabilities for the period in which the expenditure was incurred and the period prior (for accounting periods commencing on or after 22/06/2011, subject to conditions).
The credit is claimed on incremental qualifying expenditure over the amount spent on R&D activities in the base year – this is the company’s accounting period ending in 2003. For periods commencing on or after 01/01/2012, companies can avail of a volume-based regime (i.e. a 25% R&D tax credit for every euro incurred) on the first €100,000 of qualifying expenditure, which increases to the first €200,000 of qualifying expenditure for periods commencing on or after 01/01/2013. The base year rule applies to all expenditure beyond these limits. Companies have 12 months from the end of the relevant accounting period in which to make a claim.
Eligible expenditure can include expenses (e.g. salaries, overheads, materials consumed, etc.) that are deductible for the purposes of computing corporation tax. Expenditure met by grant assistance received from the State, the EU, or EEA does not qualify.
Who can claim?
As outlined above, companies from all sectors, including financial services, can avail of the R&D tax credit, and there is no restriction on how much or how little you can claim. The regime operates by way of self-assessment and there is no requirement to submit any other documentation when claiming the credit. There is, however, a requirement to maintain specific documentation to support the claim.
Many companies outsource some of their R&D activities, as the specific expertise may not be available in-house; this might be to a third-party company or a third-level institution. The legislation does allow companies to claim part of this expenditure, provided the company is still undertaking some of the R&D in-house.
The allowable third-party expenditure is limited to the greater of 10% of the company’s overall R&D spend, or €100,000; for third-level institutions, the limit if 5% of the overall R&D spend, or €100,000. A company must notify the third-party in writing that they cannot also claim the credit for the work.
While there are many activities carried out by companies in the financial services sector that could be considered R&D, similar to those outlined above, identifying and quantifying eligible expenditure for the purposes of the credit can often be quite complex. The main focus of R&D in financial services is the development of IT-based systems and processes and advanced mathematical modelling. There are five key requirements that must be met in order to qualify for the credit; R&D activities must:
- Be systematic, investigative or experimental in nature
- Be carried out within a Revenue approved field of science and technology
- Involve basic research, applied research or experimental development
- Seek to achieve scientific or technological advancement
- Involve the resolution of scientific or technological uncertainty
The legislation provides for a broad range of qualifying activities related to an R&D project. Companies should investigate their activities thoroughly against the legislation and guidelines to ensure they are not missing out on a valuable credit or cash refund.
Documentation of R&D activities is a vital part of the R&D tax credit claim. Revenue needs to understand the activities that were undertaken in the relevant period; as such all qualifying activities must be carefully documented to justify the claim, in accordance with the relevant tax legislation and Revenue guidelines.
It is also important that companies understand the legislation and Revenue guidelines, as entitlement to claim needs to be established properly; this is a complex tax technical area that interacts with other tax legislation. If the claim is audited by Revenue and elements are found to be unsupportable, the company is open to repayment of the credit, interest, penalties and, in extreme cases, publication on the list of tax defaulters.
The R&D tax credit is a highly valuable incentive, and should be investigated thoroughly by any company undertaking potentially qualifying R&D activities. However, as with any tax incentive, the credit is subject to a number of conditions, so we would encourage companies to investigate their eligibility with a qualified tax advisor prior to submitting a claim.