How is the R&D Tax Credit Paid Out?

Ireland’s R&D tax credit scheme is a favourite among innovative companies, helping them get back up to 30% of their development costs. The R&D Tax Credit, now renamed the R&D Corporation Tax Credit for accounting periods commencing on or after 1^st January 2023, can be claimed in multiple ways, depending on what suits the business.

However, knowing how to claim for your entitlement can be tricky, with changes made in 2022 and 2023 affecting the cash credit companies can receive.

Revenue announced an increase in the R&D tax credit rates, a move welcomed by many innovative Irish companies.

• Accounting periods beginning before 1^st January 2024: You can claim 25% of eligible costs.
• Accounting periods beginning on or after 1^st January 2024: The rate increases to 30% of eligible costs.

Eligible costs remain the same, despite the changes to the scheme.

The new rules for the R&D tax credit is paid in three instalments:

1. Year 1: 50% of the credit
2. Year 2: 30% of the credit
3. Year 3: 20% of the credit

You can either take these payments or elect to use the credit, or a portion of the credit, to offset tax liabilities (like corporation tax, VAT, or employment taxes).

Thanks to changes in the Finance Act 2023, companies can claim up to €50,000 in the first year, even if that’s more than the usual 50% instalment. If your claim is under €50,000, you’ll get the full amount upfront!

Larger, more established companies will often use the credit to reduce their tax bill. However, startups or loss-making companies benefit more from the cash repayment, which helps with cash flow when it’s most needed.

If a company which is part of a group elects to have the tax credit offset against its tax liabilities and some of the credit remains, the company can choose to surrender the excess to another company in its group.

Costs for constructing or renovating buildings used for research and development can be included in an R&D tax credit claim.

To be eligible, at least 35% of the building must be used for qualifying R&D activities. This usage is measured over a four-year period (although extensions may apply if COVID-19 impacted usage). The credit can be claimed on top of any capital allowances.

You can get a tax credit equal to 30% of the portion of construction or refurbishment costs related to R&D use. This is especially useful for R&D in manufacturing, where R&D often happens alongside everyday use.

Claims made for qualifying construction or refurbishment costs must be made through a separate form but are paid out in a similar manner.

In some cases, companies can use part of their R&D tax credit to reward key employees. This allows these employees to benefit from a lower tax rate — potentially reducing their effective tax rate to 23%, compared to the usual 40%+ they’d otherwise pay.

To benefit, employees need to spend at least 50% of their time on qualifying R&D activities.

This option helps companies attract and retain top talent and provides key employees with tax savings. It’s a win-win for innovative teams!

Companies can record the R&D tax credit as income in their profit and loss account (or income statement), which affects their pre-tax profit or loss.

Including the credit in your income statement directly lowers the overall cost of your R&D projects. This is important for multinational companies when deciding where to base their R&D operations. Lower unit costs can make Ireland an attractive choice!

Even if your company hasn’t started trading yet, you can still benefit from Ireland’s R&D tax credit! If you’ve incurred R&D expenses before officially starting to trade, you can claim those costs within the accounting period in which you first start trading. This setup is especially helpful for startups, allowing them to recover some early investment and maintain cash flow while getting their business off the ground.

Your claim is submitted through your Corporation Tax Return, or CT1. You’ll need to declare how you want to claim the credit and, if it’s your first claim or your first in a while, you’ll need to submit a pre-filing notification. Companies need to submit their claim within 12 months of the end of their accounting period.

However, companies need to be aware of potential audits from Revenue and ensure they have the right evidence of their R&D available for review.

If you’re not sure how to make your claim in the most effective way, get in touch with our team. At Tax Cloud, our team is made of tax and technical experts. We keep on top of the changes to legislation so you don’t have to.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud