R&D tax credits are a lifeline for innovative Irish companies but can be a minefield to properly claim. Revenue offers a generous incentive for R&D, giving companies up to 30% back on their eligible expenditure. However, the guidelines on qualifying costs are complex and difficult to understand.
To this end, we’ve written up a short guide to the basic cost categories that can be claimed.
What is eligible expenditure?
Businesses can claim back the R&D tax credit on expenditure that is, as specified by Revenue’s guidelines, wholly and exclusively incurred in the carrying on of qualifying R&D activities.
Revenue has a clear definition of R&D activity. “The carrying on” of R&D does not mean activities related to R&D, or any activities that enable or lay the foundation for R&D. Only work that actively seeks to advance science or technology can be included.
This hints at the boundaries of R&D, which begin when you identify a scientific or technological uncertainty and end with the resolution of this uncertainty.
Within this understanding, there are several categories which can be claimed, albeit with varying levels of caveats to each:
- Staff costs
- Subcontractors
- Agency staff
- Materials
- Overheads
- Cloud computing
- Royalty payments
- Capital expenditure
Staff costs
Costs for employees can be considered eligible, so long as the employees are involved in qualifying R&D activities. This means that if an employee spends a proportion of their time directly working on qualifying R&D activities, the same proportion of their total reward package (emoluments) can qualify as R&D expenditure.
What counts as emoluments?
The term "emoluments" includes all elements of an employee’s reward package, such as:
- Pension contributions
- Bonus payments
- Health insurance
- Holiday entitlement (including public holidays)
- Any other expenses covered by the company as part of the employee’s employment contract and processed through the PAYE/PREM payroll system
These emoluments should be apportioned based on the time the employee spends on qualifying R&D activities.
What staff costs don’t count?
Costs related to overheads, such as HR, payroll team costs, or canteen expenses, are not eligible. While these costs may support R&D activities, they are not directly incurred in “the carrying on” of those activities.
Subcontractors
There are two situations where companies can claim for R&D that was not carried out by itself. Both instances are referred to as “subcontracted costs”:
- Amounts spent for a university or institute of higher education to carry out qualifying R&D activities in a relevant Member State can be claimed.
- Costs incurred for another unconnected person (not to a university or institute) to carry out qualifying R&D activities for the company, can be claimed. Connected persons, i.e., a person (including a company) who can exercise control over the company, cannot be included as subcontracted costs.
The relief is limited to the greater of:
- 15% of the company’s own R&D expenditure
- €100,000
This is subject to the condition that the company spends at least the same amount on qualifying R&D activities that it conducts internally. The limits set out for the two situations above are applied separately.
In order to claim the R&D credit for subcontracted costs, the company must notify the subcontracting party in writing that they may not claim the work that was subcontracted to them.
Agency Staff
Under Ireland’s R&D tax scheme, agency staff are treated as outsourcing and follow the same guidelines as the subcontractors (see above).
Individual consultants
However, the exception to the above rule is for individual consultants. Individuals who are hired on a part-time or short-term basis can be claimed as part of the direct employee costs, provided the individual:
- works under the company’s control and direction
- works on the company’s premises
- contributes specialist knowledge
- is engaged by the company for 6 months or less
Materials
Companies can claim for materials used in R&D. For example, a company that makes various prototypes within their R&D project can claim for the cost of materials. However, some materials may be of further commercial value after their research use has concluded. In this case, companies need to work out if the materials were “wholly and exclusively” used in R&D.
If there is the potential for the materials or R&D product to be sold, the cost of the remaining materials or product should be deducted from the claimed expenditure.
Overheads
Some overhead costs can be included, so long as they were “wholly and exclusively” used for R&D. For example, a portion of heat and power can be claimed if the apportionment is made with a reasonable method (e.g., R&D staff costs versus total staff costs). However, administration and general support services not exclusively done for the R&D project cannot be claimed, including transportation, storage, cleaning, repairs and security.
Rental costs
In most cases, rental costs support R&D but are not “wholly and exclusively” incurred for R&D.
Rental costs can only be included if the space or facility is critical for the R&D carried out. Largely, this means specialised spaces can be included, such as laboratories or clean rooms, if they relate entirely to the R&D project(s). However, specialised spaces that are used for R&D and non-R&D purposes cannot be claimed.
In contrast, rental costs for a standard office space, whether or not it houses the R&D team, cannot be claimed as the office space in itself is not critical to the R&D and does not perform a key function in relation to the R&D process.
Cloud computing
Costs incurred on cloud computing are allowable costs R&D expenditure where those costs are incurred for R&D. Usually, this means applying an apportionment based on a reasonable methodology (based on R&D staff or perhaps on the number of licenses used for R&D).
Royalty Payments
Royalty payments or other payments for the use of intellectual property may qualify if they are incurred wholly and exclusively for R&D. However, there are limits on this if the payments are made to a connected company.
Capital Expenditure
Long term costs that are amortised can qualify for R&D tax credits, so long as the capital expenditure meets certain requirements.
Plant & Machinery
Plant and machinery costs can qualify if the expenditure is also eligible for capital allowances. However, if the equipment is used for R&D and non-R&D purposes, an apportionment needs to be made using a reasonable method.
Buildings
Costs for building or refurbishing a facility used for qualifying R&D can count as R&D expenditure. However, certain conditions must be met, such as ensuring that at least 35% of the building’s activities over four years involve qualifying R&D.
What can’t be included?
Costs that aren't directly related to the R&D work – like recruitment fees, insurance, travel, equipment repairs, shipping, business entertainment, phone bills, bank charges, and interest – won’t count as eligible expenses. Even if they indirectly impact the R&D, these costs are not incurred exclusively for R&D.
Essentially, any costs that would have been paid with or without the R&D project are unlikely to qualify.
Grants
Unfortunately, grant-funded projects are at a disadvantage within the R&D tax scheme, in that the majority of costs are ineligible. Any costs that are covered by state aid (such as through a Horizon Europe or Enterprise Ireland grant) cannot be claimed in a R&D tax claim. However, any costs that are not covered by the grant can be claimed, should they meet the above conditions.
How can you make a claim?
With all these conditions and hoops to jump through, it’s a complicated process making an accurate and compliant claim! That’s why Tax Cloud takes out the guesswork with our resident R&D Cost & Tax experts reviewing all your costs to ensure your claim is made properly.
Find out how much R&D tax credits could be worth to your company by using our R&D tax calculator, or sign up now to get started on your claim.
