R&D tax credit

A company must make a claim for an R&D tax credit within 12 months of the end of the accounting period. Thus, the corporation tax return may be amended for a period of just over 3 months from the filing deadline if the company wishes to make a claim for this tax relief. It is critical to be cognisant of this deadline as if no claim is made prior to this, any potential tax relief will be lost.

It is worth noting that Revenue have been reviewing a significant number of historic R&D tax credit claims. The main issue emanating from these reviews is the reduced scope for including overheads in R&D tax credit claims. This ties in with Revenue’s updated Guidance Notes, available on the Revenue website and worth reading, although these of course reflect Revenue’s interpretation of the legislation. Documentation is critical to support the R&D activities being carried out, while the cornerstone for making a claim hinges upon meeting the science/ technology test.

Prior to 2015, the R&D tax credit was claimed on R&D expenditure over the base year (i.e. 2003) expenditure. However, for companies with a year end 31 December 2014, the first €300,000 of qualifying expenditure should qualify for the R&D tax credit regardless of the base year spend. Thus, the base year rule will only adversely impact companies with a base year spend in excess of €300,000 for 2014. It is worth noting that this base year rule will not apply for periods from 1 January 2015.

Implications arising from late filing

There can be penal implications where the corporation tax return for a company is not filed by the due date. Firstly, a surcharge of 5% of the corporation tax liability may arise if the return is filed late but within 2 months of its due date (subject to a cap of €12,695). This surcharge increases to 10% where it is filed more than 2 months after the deadline (subject to a cap of €63,485).

Secondly, the ability to claim losses or group relief may be restricted. Section 1085 TCA 1997 sets out the loss relief claims that would be restricted where the corporation tax return is not filed by its due date. Where the return is filed late but within 2 months of the due date, the relief is restricted to 75% of the relief otherwise available, subject to a maximum restriction of €31,745. This restriction increases to 50% subject to a maximum of €158,720 where the return is filed more than 2 months after the due date. However, there is no restriction on the use of losses forward.

Thus, late filing can have a significant adverse impact on the tax payable position for a group where the corporation tax returns are not filed by the due date. It would be preferential to file on time and submit a letter of repair at a later date if necessary.

Review of preliminary tax position

As soon as the final corporation tax computation and return have been prepared, it is worth revisiting the tax payable position to ensure the company has met its preliminary tax obligations. Where either the first or second instalments of preliminary tax have been underpaid, there may be an interest exposure as 100% of the tax may become due by 23 November 2014 (for companies with a 31 December 2014 year end). Thus, it may be worth paying any outstanding tax liability as soon as possible in order to stop interest accruing on any underpayments of preliminary tax. For large companies (those with a prior year tax corporation liability in excess of €200,000) it would also be worth reviewing the first preliminary tax payment relating to 2015. For those companies that based it on 50% of the prior year (i.e. 2014) liability, this calculation should be re-run in light of the final 2014 corporation tax liability. Where appropriate, a top-up payment should be considered.

Group relief

It is useful to examine the taxable profits, losses arising and tax payable position of all entities in a group in order to consider whether group relief can be claimed/ surrendered. Losses can only be surrendered by way of group relief in the year in which they are incurred. Where the accounting periods of companies within a group do not fully correspond, it is necessary to time apportion the losses surrendered or profits being sheltered by looking at the common period of the tax accounting periods of the two companies.

Where there is an investment management company with excess management expenses or a company which has qualifying section 247 interest as a charge, consideration should be given to surrendering these amounts to a company with income taxable at the higher corporation tax rate of 25%. This exercise should be carried out in order to maximise the value of the group’s losses.

Transfer pricing

Currently, Revenue do not require formal transfer pricing documentation to be submitted with the filing of a corporation tax return. However, for a company to file a “complete and correct tax return”, transfer pricing documentation must exist at the time the tax return is filed. This stems from the fact that a taxpayer can only form a view that related party transactions included within a tax return were conducted at arm’s length prices by having appropriate transfer pricing documentation. Thus, large groups should ensure they have sufficient support in place to substantiate intra-group transactions.

Medical insurance – tax relief at source

Where an employer pays medical insurance on behalf of staff, the 20% tax relief at source withheld by the company is paid to Revenue along with the corporation tax due. However, the rules have changed for policies entered or renewed on or after 16 October 2013. The tax relief at source is now limited to €200 for an adult and €100 for a premium paid on behalf of a child. Therefore, it is important to get an accurate valuation of the tax relief at source withheld on medical insurance payments made by a company. In practice, the health insurer should generally provide an accurate breakdown on request from the client.

iXBRL requirements

It is important to consider whether each company has an obligation to file iXBRL financial statements along with its corporation tax return. In order to ascertain whether or not a company must file iXBRL tagged accounts, consideration should be given to whether the company is dealt with by Large Cases of Revenue (as all such companies must now file iXBRL financial statements unless there are minimal movements to the P&L and balance sheet figures). Furthermore, companies meeting the following criteria are currently excluded:

1. The balance sheet total of the company does not exceed €4.4 million (Revenue have issued guidance on the calculation of this figure and it should be based on the aggregate of assets without any deduction of liabilities with some transitional measures in place);
2. The amount of the turnover of the company does not exceed €8.8 million; and
3. The average number of persons employed by the company does not exceed 50.

The above criteria are looked at on a company by company basis.

Where a company files iXBRL financial statements, it is no longer required to complete the extracts of accounts on the Form CT1. iXBRL financial statements should be filed on or before the corporation tax return filing deadline. Revenue are allowing an additional 21 days from the corporation tax return filing deadline and there is currently no indication as to when this extension will cease.

Other considerations

• Review the comparative numbers in the financial statements to ensure the prior year tax return is correct
• Review the prior year computation and conclude on whether there is any scope to carry trading losses back to the preceding period, thus securing a tax refund
• Ensure all elections are included within return, i.e. S452 elections to ensure certain intra-group interest paid is not regarded as a distribution
• Consider whether there is any scope to make a claim for specified intangible assets tax relief under Section 291A TCA 1997
• Review the fixed assets position to ensure capital allowances are claimed correctly. In particular, ascertain whether any energy efficient equipment was acquired upon which 100% capital allowances may be available
• Review any bonus accruals not paid within six months of year end/long term incentive plans to ensure an addback is taken for corporation tax purposes where appropriate
• Consider whether there is a long/short accounting period and assess the implications this may have on filing and payment deadlines
• Scrutinise the accounts to conclude on whether there was any new trade or cessation of a trade during the year
• Check the auditor’s report in the financial statements and ensure that any qualified opinions are disclosed in the Form CT1
• Review the close company surcharge position and check the distributable reserves position in tandem with this analysis – as part of this, consider whether future dividend payments will be required to avoid the imposition of a close company surcharge in future years
• Consider whether any joint elections should be made under Section 434(3A) TCA 1997 to avoid franked investment income being surchargeable in the recipient company
• Review any expenses or benefits in kind payable to participators or associates of participators of close company to conclude on whether they may be regarded as being “distributions” (which would not be deductible for corporation tax purposes)
• Analyse any loans made by a close company to its participators or associates with a view to confirming whether any income tax would arise upon issuance of these loans

Conclusion

In summary, there are a multitude of issues to be aware of when preparing corporation tax returns for clients. The application of the above points will vary on a client by client basis. Equally, there may be significant tax planning opportunities that should be identified as part of the tax compliance process. By viewing the compliance process as more than a “tick the box” exercise, it can become a value added process.

Sarah Meredith is a Tax Director with Grant Thornton

Email: sarah.meredith@ie.gt.com

Brendan Murphy is a Tax Manager with Grant Thornton

Email: Brendan.Murphy@ie.gt.com

Website: www.grantthornton.ie