Corporation Tax (CT): Specified Intangible Assets; Research and Development

Question 1

How is depreciation for tangible assets (ex. machinery) treated in tax computations, and what method does Revenue use to allow for it?

Answer 1

Depreciation for tangible assets is not an allowable expense for tax purposes and must be added back in the adjusted profit computation.

Revenue allows for depreciation through their own system called Wear and Tear (W&T).

Question 2

How can amortization for intangible assets like patents be claimed in tax computations?

Answer 2

For intangible assets such as patents, a company has the option to claim amortization either as per the accounts or to choose an alternative fixed write-down period of 15 years at a rate of 7% per annum, with 2% in the final year.

Question 3

What is the tax relief available for capital expenditure incurred on the acquisition of intangible assets for trade purposes?

Answer 3

Tax relief is available in the form of capital allowances for capital expenditure incurred on the acquisition of intangible assets, provided these assets are used for the purposes of a trade.

Question 4

What are the criteria for intangible assets to qualify for capital allowances under the scheme?

Answer 4

To qualify for capital allowances, intangible assets must be recognized as such under generally accepted accounting principles (GAAP) and must be listed as specified intangible assets in legislation (SIA).

Question 5

What are examples of Specified Intangible Assets (SIA)? (5 examples)

Answer 5

Specified Intangible Assets include:

1. Patents
2. Trademarks
3. Brands
4. Copyrights
5. Know-how

Question 6

Is goodwill considered a Specified Intangible Asset (SIA), and if so, under what condition?

Goodwill in a business context is an intangible asset that arises when a company acquires another business at a price higher than the fair value of its net identifiable assets at the time of acquisition. Essentially, goodwill represents the premium paid over the tangible and other intangible assets acquired

Answer 6

Goodwill is included as a Specified Intangible Asset (SIA) but only to the extent that it relates to the categories of intangible assets listed, such as patents, trademarks, and copyrights.

Question 7

What happens to the expenditure on Specified Intangible Assets (SIA) incurred before trading commences?

Answer 7

If expenditure on Specified Intangible Assets is incurred before trading commences, it is allowed as a deduction when the relevant trade actually begins.

Question 8

How is the Writing Down Allowance (WDA) for Specified Intangible Assets (SIA) calculated?

Answer 8

The Writing Down Allowance (WDA) for Specified Intangible Assets can be calculated using either:

1.	The standard accounting treatment, as included in the Income Statement (IS), or
2.	A fixed write-down period of 15 years, at a rate of 7% per annum and 2% in the final year.

Question 9

What is the exception to the normal Balancing Allowance (BA) and Balancing Charge (BC) rules on the disposal of Specified Intangible Assets (SIA)?

Answer 9

There is no clawback if the SIA, acquired before 14 October 2020, is disposed of more than 5 years after the beginning of the accounting period in which the asset was first provided.

Question 10

What are the rules for disposal of SIA to a connected company?

Answer 10

For disposals to a connected company, the subsequent capital allowances claim is based on the lower of:

1.	The amount that was paid, and
2.	Allowances not claimed by the previous owner.

Question 11

What is the restriction/condition on relief for Specified Intangible Assets (SIA)?

Answer 11

Relief is targeted to the trading activity in which the SIA is used; specifically, the SIA must be used for the purposes of a ‘Relevant Trade’ (RT).

Question 12

What constitutes a relevant trade for the purposes of Specified Intangible Assets (SIA) restrictions? (2)

Answer 12

A relevant trade consists of:

1.	Managing, developing, or exploiting intangible assets, or
2.	Activities that involve the sale of goods or services which derive the greater part of their value from the intangible assets, or whose value is increased by the use of intangible assets. Ex.  Managing, Developing, or Exploiting Intangible Assets.

Question 13

What is the 80% restriction on capital allowances and related interest expense for expenditures incurred after 11 October 2017?

Answer 13

For expenditures incurred after 11 October 2017, the aggregate of capital allowances and related interest expense that can be claimed for any accounting period may not exceed 80% of the relevant trading income of the relevant trade for that accounting period.

Question 14

How are profits of the relevant trade typically calculated, and how does the 80% restriction apply?

Answer 14

The profit of the relevant trade (per accounts) is usually calculated after claiming amortisation and interest on borrowing to fund the acquisition of the SIA. The 80% restriction applies to these profits before claiming amortisation and interest.

Question 15

How do you calculate the 80% restriction on the relevant trading income for SIA expenditures?

Answer 15

To calculate the 80% restriction, it is necessary to adjust the profits of the relevant trade per the income statement by adding back the amortisation and interest.

Question 16

Is there a stamp duty exemption for qualifying intellectual property, and how does the definition of intellectual property for WDA on SIA relate to the definition for stamp duty purposes?

Answer 16

Yes, there is a stamp duty exemption for qualifying intellectual property.

The definition of intellectual property for the WDA on SIA is the same as the definition used for stamp duty purposes.

Question 17

What are the basic details of the research and development (R&D) tax credit for companies in Ireland?

Answer 17

The R&D tax credit provides companies with a 25% tax credit on qualifying R&D expenditure. There is no minimum spend requirement and no limit on the qualifying expenditure for a qualifying company.

Question 18

What types of expenditures qualify for the R&D tax credit and which companies are eligible?

Answer 18

Both revenue and capital expenditures (e.g., wages, plant, and machinery) can qualify. The credit is available to all companies within the charge to Irish Corporation Tax (CT) that undertake R&D in the European Economic Area (EEA).

Question 19

How does research and development (R&D) expenditure reduce a company’s Corporation Tax (CT) bill in Ireland?

Answer 19

R&D expenditure reduces a company’s CT bill in two ways:

1.	It saves 12.5% as an expense.
2.	It saves 25% as a tax credit.

This results in a total saving of 37.5%.

R&D expenditure is often deductible against a company’s taxable profits. This means that the costs associated with R&D activities can be subtracted from the company’s total income before calculating the tax owed. For example, if the corporate tax rate is 12.5% (as it is in Ireland), every dollar spent on R&D effectively reduces the company’s tax bill by 12.5 cents. This is because the expense lowers the taxable income by that dollar, and 12.5% of that dollar is what would have been paid as tax.

Question 20

What are the criteria for a Qualifying Company to claim the R&D tax credit? (3 + 2)

Answer 20

A Qualifying Company must meet one of the following criteria:

1.	Carries on a trade itself,
2.	Is a 51% subsidiary of a trading company, or
3.	Is a member of a trading group.

Additionally, the company must carry out R&D activities, maintain records of R&D activity, and keep separate records if R&D is conducted in different geographical locations.

Question 21

What qualifies as R&D activities for the R&D tax credit?

Answer 21

Qualifying R&D activities involve systematic, investigative, or experimental activities in the field of Science or Technology. This includes:

1.	Basic research,
2.	Applied research, or
3.	Experimental development.

Additionally, these activities must:

1.	Seek to achieve scientific or technological advancement, and
2.	Involve the resolution of scientific or technological uncertainty.

Question 22

What additional conditions apply to Qualifying R&D Activities for the R&D tax credit? (3 points)

Answer 22

1. R&D does not have to be successful.
2. The company claiming the R&D credit does not have to hold the IP rights resulting from the R&D work.
3. Expenditure must be incurred wholly and exclusively in carrying on the R&D activity. Indirect costs are excluded (e.g., wages of admin staff are excluded as they are not incurred wholly and exclusively in carrying on the R&D activity).

Question 23

What are the criteria for Qualifying R&D expenditure for the R&D tax credit? (5 criteria)

Answer 23

Qualifying R&D expenditure must:

1.	Be incurred on R&D activities in an EU/EEA member state.
2.	Be incurred by an Irish resident company.
3.	Relief is available only if the expenditure is not available for tax relief elsewhere.
4.	Be an allowable deduction as a trading expense or as a charge.
5.	Qualify for tax relief in the State under one of the following headings:
•	As capital allowances on Plant & Machinery (P&M), or
•	As expenditure that qualifies for the scientific research allowance.

Question 24

What additional criteria and conditions apply to Qualifying R&D expenditure for the R&D tax credit? (6 criteria)

Answer 24

1. R&D does not have to be successful.
2. Qualifying expenditure is net of grants.
3. Allowed to apportion on a just and reasonable basis (e.g., an item of Plant & Machinery used 40% in R&D).
4. Interest payments do not qualify as expenditure on R&D (but would qualify as a CT deduction at 12.5%).
5. Cost-sharing contribution from another company in the international group is ignored – gross expenditure on R&D qualifies for the R&D tax credit.
6. Documentary evidence must be maintained to support the claim.

Question 25

What are the criteria for claiming the R&D tax credit for subcontracted or outsourced R&D activities to universities or institutes of higher education? (3 points)

Answer 25

1. Sum paid to a university or institute of higher education.
2. Limit: 15% of non-outsourced (in house) R&D expenditure or €100,000, whichever is higher. This means if a company spends €500,000 on non-outsourced R&D, the maximum subcontracted R&D expenditure eligible for the credit is €75,000 (which is 15% of €500,000).
3. The company must incur at least the same level of expenditure on R&D activities it carries out itself.

Question 26

What are the criteria for claiming the R&D tax credit for subcontracted or outsourced R&D activities to non-connected persons? (3 points)

Answer 26

1. Sum paid to a person who is not a connected person.
2. Limit: 15% of non-outsourced R&D expenditure or €100,000, whichever is higher.
3. The company must notify the subcontractor in advance of making a payment that the company itself will be making an R&D claim. The subcontractor is therefore not entitled to claim R&D.

Question 27

What expenditures on buildings used for R&D qualify for the R&D tax credit? (4)

Answer 27

Expenditure on construction, reconstruction, repair, or renewal of a qualifying building qualifies for the R&D tax credit, net of grants. The cost of the site is excluded.

Question 28

What is a ‘Qualifying Building’ used for R&D, and what are the criteria? (3 criteria)

Answer 28

A ‘Qualifying Building’ used for R&D must:

1.	Qualify for capital allowances as an industrial building.
2.	Be used for R&D purposes for at least 35% of the time over a specified 4-year period.
3.	Not qualify for tax relief in another EEA country.

Question 29

What are the criteria for two companies to be considered in an R&D group? (3 criteria)

Answer 29

Two companies are in an R&D group if:

1.	One is a 51% subsidiary of the other, or
2.	Both are 51% subsidiaries of a third company (EU/DTA countries can be used to determine if the 51% test is met), or
3.	They are under common control.

Question 30

How can R&D expenditure be allocated within an R&D group?

Answer 30

R&D expenditure can be allocated to Irish resident companies or Irish branches of foreign companies as desired, but Revenue must be notified in writing.

Question 31

What happens if no allocation claim is made within an R&D group, and how can excess R&D tax credit be used?

Answer 31

If no allocation claim is made, R&D expenditure is allocated in the same proportion as the group’s total expenditure (e.g., if a company incurs 50% of group R&D, it gets 50% of the group R&D tax credit).

The same R&D rules apply as for a single company: excess R&D tax credit can be carried back to the previous accounting period, refunded, and carried forward.

Example Scenario

Imagine a tech company, “InnovateTech,” that spends €300,000 on qualifying R&D activities during the 2023 accounting period. Assume the R&D tax credit rate is 25%.

Calculation of R&D Tax Credit

•	R&D Expenditure: €300,000
•	R&D Tax Credit @ 25%: €300,000 x 25% = €75,000

Application of the R&D Tax Credit

•	Tax Liability for 2023: €90,000
•	R&D Tax Credit Available: €75,000

Application against Tax Liability:

•	The €75,000 R&D tax credit can be applied against the tax liability of €90,000, reducing it to €15,000 (€90,000 - €75,000).

Excess R&D Tax Credit Handling

Since InnovateTech uses all of its R&D tax credit in 2023, let’s adjust the scenario to generate an excess credit situation:

•	Adjusted R&D Expenditure: €400,000 (leading to a larger credit)
•	Adjusted R&D Tax Credit @ 25%: €400,000 x 25% = €100,000
•	Tax Liability for 2023 remains: €90,000

After using the credit:

•	€90,000 is reduced by the full credit of €100,000, creating an excess credit of €10,000 (€100,000 - €90,000).

Handling Excess Credit:

1.	Carry Back: InnovateTech can opt to carry back the excess credit of €10,000 to the previous accounting period (2022). If there was a tax liability in 2022, this amount could offset it.
2.	Refund: If the excess cannot be fully utilized through carry back or if the company chooses, it may seek a refund for some or all of the excess €10,000.
3.	Carry Forward: Alternatively, or in addition to other options, the excess credit of €10,000 can be carried forward to offset future tax liabilities.

Question 32

How can a company use the R&D tax credit to reward key employees, and when can the employee use the credit?

Answer 32

A company can reward key employees working in R&D activities by surrendering all or part of the R&D tax credit to them.

The employee can use the tax credit in the year following the year in which the company surrenders the tax credit.

Question 33

What are the conditions for an employee’s emoluments and duties to qualify for the R&D tax credit?

Answer 33

• At least 50% of the employee’s emoluments must qualify as R&D.
• At least 50% of the employee’s duties must involve the conception or creation of new knowledge, products, processes, methods, or systems.

Question 34

What distinguishes a key employee in the context of the R&D tax credit?

Answer 34

A key employee is characterized by their significant contribution to R&D, such as a Scientist (who could be considered key depending on their duties), in contrast to a Lab Technician, who is less likely to be considered key.

Question 35

Who is excluded from receiving the R&D tax credit under the Reward Key Employees scheme?

Answer 35

• Directors
• Shareholders who own 5% or more of the company or an associated company

Question 36

How can the R&D tax credit be used to reduce an employee’s income tax under the Reward Key Employees scheme?

Answer 36

The tax credit can only reduce the employee’s income tax to a minimum effective rate of 23%. Any unused excess can be carried forward.

Question 37

What are the key points for claiming the R&D tax credit and the time limit for the claim?

Answer 37

The R&D tax credit not surrendered to employees must be claimed within 12 months from the end of the accounting period.

Question 38

What are the options for utilizing the R&D tax credit as per the FA 2022 changes? (2 options)

Answer 38

The R&D tax credit can either be:

•	Offset against the company’s tax payable (treated as an overpayment), or
•	Claimed as a refund.

Additionally, the R&D tax credit set against the Corporation Tax (CT) due reduces the preliminary tax payable by that offset amount.

Question 39

How is the R&D tax credit claimed in instalments?

Answer 39

The R&D tax credit is claimed in three instalments:

1.	The greater of the full R&D tax credit up to a maximum of €25,000 or 50% of the credit in the year of the claim.
2.	60% of the remainder of the R&D tax credit 12 months after the first claim.
3.	The balance of the unused R&D tax credit 12 months after the second claim.

Question 40

What are the conditions for the clawback of the R&D tax credit for buildings or structures?

Answer 40

If a building or structure qualifying for the R&D tax credit is sold or ceases to be used for R&D activity or for purposes of the same trade carried on by the company at the start of the ‘specified relevant period’ (within 10 years), no further R&D credit is allowed and the R&D credit previously allowed will be clawed back.

Question 41

What are the clawback rules and penalties for the R&D tax credit? (5 points)

Answer 41

1. Include as Case IV - four times the credit granted, taxed at 25%.
2. Clawback is eight times the credit surrendered to key employees if the claim is deliberately false or overstated.
3. No claims are allowed against such clawback tax due (e.g., loss relief).
4. Such Case IV is ignored for Close company surcharge purposes.
5. Penalties and interest apply.