Finance Act 2004 - Research & Development Credit

Section 33 inserts two new sections into the TCA 1997 that provide for a 20% tax credit as a new incentive for companies that carry out Research and Development (R&D). The first section, Section 766 that replaces the existing Section 766, contains an incentive in relation to R&D expenditure other than expenditure on buildings. The second section, Section 766A, contains rules for the treatment of expenditure on buildings.

The new incentive is subject to clearance by the European Commission from a State aid perspective, and will come into operation by way of a commencement order to be made by the Minister for Finance following such clearance.

The new Section 766 provides an incentive for incremental expenditure on R&D. A credit of 20% of the incremental spend can be offset against a company’s corporation tax liability for the current year. Any unused credit can be carried forward indefinitely against the corporation tax liability for subsequent accounting periods of the company until it is used up.

The scheme is an incremental one whereby expenditure over a defined base will qualify for the credit. For the first three years of the scheme (i.e. 2004 - 2006) the base will be R&D expenditure incurred in 2003. Thereafter, there will be a rolling one year base i.e., for 2007 the base will be expenditure incurred in 2004 and for 2008 the base will roll on to expenditure incurred in 2005 and so on. The base will be calculated and apportioned on a group basis and a group can elect how to share the credit among group members. An amount equal to 20% of the incremental spend apportioned to a company is then available to reduce the corporation tax of that company.

Expenditure on R&D is defined as expenditure incurred on R&D activities carried on by the company in the European Economic Area (EEA) in a relevant period. The expenditure must qualify for tax relief in the State and in the case of an Irish resident company must not qualify for tax relief outside of the State. The tax credit will not be available for royalty payments that are exempt royalty income in the hands of the recipient.

The legislation contains a core definition of R&D activities. The Minister for Enterprise, Trade and Employment, in consultation with the Minister for Finance, will make regulations for the purposes of providing detailed guidance on what activities constitute R&D activities for the purposes of the tax credit.

Where a company that incurs expenditure on carrying out R&D activities also pays a sum to a university or institute of higher academic education in the EEA for that university or institute to carry out R&D for the company, the sum so paid, up to an amount that does not exceed 5 percent of the expenditure incurred on R&D activities carried out by the company, will qualify for credit.

The new Section 766A provides that where a company incurs relevant expenditure on the construction or refurbishment of a building or structure which is to be used for the carrying on by it of R&D, the company will be entitled to a tax credit of 20% of the cost of construction or refurbishment but this will be allowed over a period of four years as a credit against corporation tax. Relevant expenditure on a building or structure is expenditure on the construction of a building or structure which qualifies for capital allowances in the State but does not qualify for the relief in any other territory.