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On SMEs, the Finance Bill improves R&D credits for small companies and leaves out medium ones

Tom Maguire Sunday Business Post Column

I wrote on the R&D tax credit in these pages after the public consultation on the matter earlier this year. As I’ve always said “consultation with us, decreases consternation amongst us”. Changes were made in this year’s Finance Bill following that consultation, and while we didn’t get all that we wanted in the bill, it was a start. A journey begins with a single step and so forth and that’s generally how we roll with these things, we “suck it and see”. If it tastes nice e.g. benefitting society more than it cost, then we might add a little sugar by extending it in later years.

Sugar is necessary in creating jam (can’t you tell I’m not related to Neven Maguire!) but jam today is better than jam tomorrow and maybe that’s something we should focus on. I get we’re in uncertain waters at the minute but let’s revisit these issues as soon as possible.

In my column, I asked for an increase in the R&D credit for SME’s, we got an increase for micro and small companies. I asked for subcontracting to universities to be looked at and the bill increases the allowable limit on R&D expenditure that can be outsourced to universities or institutes of high education from 5 to 15% (it was already at that level for third parties). Full disclosure, I’d like to take credit for these things but they’ve been asked for by industry for some time.

And now, the science bit: The R&D credit effectively reduces the costs of doing R&D by 25 per cent. Where a tax deduction can be taken for the expenditure incurred in computing a company’s trading profits, then the benefit to the company concerned can be 37.5 per cent of the related expense. All this is done by reducing the cheque the company has to write for corporation tax for that year.

Any unused amount can be carried forward and used to reduce corporation tax bills in subsequent periods. Where an excess amount remains, instead of carrying it forward, a company can use it to reduce its preceding period’s tax bill, which may give rise to a tax refund. Any amount left over can still be carried forward by that company to reduce its future tax bills. Alternatively, the company can claim to have the excess amount refunded by Revenue in three instalments over a period of nearly three years from the end of the accounting period in which the expenditure was incurred. So reduce or refund is the mantra here.

The key point is that the company concerned must have incurred qualifying R&D expenditure. There are substantial Ts & Cs on this one, but it doesn’t mean that the company must be competing with NASA to be in the ball park as the law’s definition covers the full range of R&D activities from basic research and applied research to experimental development.

According to the Tax Strategy Group (Government think tank) papers that issued after my column in July the cost to the exchequer of the R&D credit in 2017 was €448 million, which was claimed by 1,505 companies and was down for a peak cost in 2015 of €708 million. According to those papers the R&D credit is number 2 in what they call the country’s “top 10 expenditures by cost”. Putting that in perspective it’s a full two places above medical insurance relief of €329m. Therefore this relief is important given it helps the carrying on of R&D here. Maybe it needs to get to pole position and if the next “instagoogletweetface” (as Woody Harrelson called it in the “Triple 9” movie) were to start here because of the credit’s assistance then game on?

But back to the credit’s workings, you see the reference to 25% I made earlier, that’s to be increased to 30% for “micro and small” companies (let’s just call them “small”). A European Commission recommendation defines a small enterprise as one which employs fewer than 50 persons and whose annual turnover and/or annual balance sheet total does not exceed €10 million. A microenterprise is defined as one which employs fewer than 10 persons and whose annual turnover and/or annual balance sheet total does not exceed €2 million. The small and micro companies are a subset of the European “SME” definition so medium companies are left out in the cold on this one. This could be down to the “suck it and see” approach I mentioned earlier but hopefully this could be addressed in future Finance Bills.

The bill goes further for small companies and allows them to take credit for R&D expenditure that it incurs before it starts trading and while it’s not yet trading. In the past a company could claim the credit for pre-trading expenditure but only when it commenced trading. The bill improves the situation by allowing a claim to be made before the trade commences. According to the Finance bill small companies can set the R&D tax credit off against certain payroll taxes and VAT for pre-trading activities. All this is welcome given that it can help the company to get the trade off the ground. At that stage of a company’s existence every euro saved makes a difference.

The question then is when does a company start to trade? Simple question, but the answer, not so much. In short it can be when the company throws open its doors for business, but to say that is to summarise almost two hundred years of court decisions here and abroad in one go so you just know I’m not doing that justice. But nonetheless this was a good move and something that can be built on.

Going beyond small companies for a moment, some companies do not have the internal resources to get R&D done and therefore look outside their walls by subcontracting activity out to others. However, that may be restricted from a R&D credit perspective so that a company with in-house capability may have an “R&D tax credit” advantage over another company without similar internal resources.

Where a company pays a university or institute of higher education to carry on certain R&D activities, then that cost should be creditable to the extent of the greater of 5 per cent of that expenditure, or €100,000. The Finance Bill says that that 5% is to be increased to 15%. That’s available to all companies so medium companies are not overlooked here. However the maximum limit is not to be changed and that’s something that should be looked at.

Some of the above won’t be switched on until the Minister gives the order as Europe will have to give the go/no go signal. Overall, we have a start here. Medium companies will be disappointed with some of the above, but we’re in suck it and see territory here people.

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