Early preparation of R&D Tax Credit claims has always been considered best practice. It allows for a robust evaluation of project eligibility and the R&D expenditure to be optimised. Capturing documentation to support the claim is made easier the closer this is done to when the R&D is carried out. For these reasons, more and more companies are taking a “real-time” approach to their claims whereby activities/costs are evaluated and supporting documentation captured as projects progress.
While the benefits of preparing claims early are clear, up to now companies receiving the tax credit as payable credits have had little incentive to actually submit their claims early. As explained in more detail below, the legislation has restricted payable credits from being paid out before specific dates irrespective of when the claim was submitted. Finance Act 2022 removes this restriction and introduces a number of other positive changes that may make it advantageous for you to get your R&D Tax Credit claim in early in 2023.
The new rules introduced by Finance Act 2022 will apply to all claims in respect of accounting periods commencing on or after 1st January 2023. Transitional rules apply to claims in respect of accounting periods commencing in the period 1st January 2022 to the 31st December 2022 inclusive. Under these transitional rules, companies can decide whether to claim under pre or post Finance Act 2022 rules.
Below we set out 5 reasons that it may be advantageous to get your R&D Tax Credit claim submitted early in 2023.
1. Increase in the first instalment amount
Under the pre-Finance Act 2022 rules, a company with an R&D Tax Credit that exceeds its corporation tax liabilities can make a claim to receive the excess as a payable credit in 3 instalments. The first instalment is calculated at 33% of the excess.
Finance Act 2022 introduces a new three-year fixed payment regime for all companies (i.e. whether profitable or loss making). Under the new regime, the first instalment is calculated as the greater of 1) 50% of the R&D Tax Credit for the period or 2) €25,000 (or if lower, the amount of the R&D Tax Credit).
Therefore, the first instalment receivable has increased under the new rules and if your company’s R&D Tax Credit is €25,000 or less, the full amount can be received in the first instalment.
2. Payable credit restriction has been removed
Since the option to receive the R&D Tax Credit as a payable credit was first introduced by Finance (No. 2) Act 2008, there has been a restriction on the amount that a company can receive as a payable credit. This restriction has been calculated based on either the company’s payroll liabilities or its corporation tax liabilities for periods specified in the legislation.
For accounting periods commencing on or after 1st January 2022, this restriction has been removed whether claiming under pre or post Finance Act 2022 rules.
3. Your first instalment can be received earlier
Prior to the Finance Act 2022, the earliest that the first instalment of the payable credit could be paid by the Revenue Commissioners was the specified return date of the CT1 for the period. The legislation also provided that the second and third instalments would be paid no earlier than 12 and 24 months after this date respectively.
Finance Act 2022 introduces changes that instead align the payment dates of instalments with the submission of the relevant tax return. Therefore early submission of your claim should result in earlier receipt of payment.
4. Instalments two and three from prior year claims can also be received earlier
Similarly, where a company is due to be paid instalments two and three for claims made in respect of accounting periods commencing prior to 1st January 2022, it may also be possible to accelerate payment of these instalments as a result of changes introduced in Finance Act 2022.
5. It will help with putting process in place for preparing a "Valid Claim"
Finance Act 2022 introduces the term “valid claim” into the R&D Tax Credit legislation for the first time. This will likely become a very important term as all timelines regarding payments of the R&D Tax Credit are premised on the making of a valid claim. The term is defined as:
a claim in relation to the credit which is made under and in accordance with this section and in respect of which all information which the Revenue Commissioners may reasonably require to enable them determine if, and to what extent, the credit is due to a company in respect of an accounting period, has been furnished by that company.
Other sections added by Finance Act 2022 provide insight into some of the information that the Revenue Commissioners will require. For example, in one of the new sections it is stated that the following details must be provided:
(i) the amount of the expenditure attributable to research and development activities incurred by the company during the
accounting period concerned in respect of —(I) machinery or plant as referred to in section 766(1A)(a), and
(II) emoluments of the employees carrying on qualifying research and development activities,
and(ii) the sum of the remaining qualifying expenditure incurred by the company during the accounting period concerned.
Tax and Duty Manual Part 29-02-03 (aka the R&D Tax Credit Guidlines) is also a useful source of guidance on the type of information that the Revenue Commissioners typically expect to be maintained.
However, in our view, the R&D Tax Credit scheme would benefit from the publication by the Revenue Commissioners of a clearly defined list of records that should be maintained for a claim to be considered valid. The use of subjective terminology such as “information which the Revenue Commissioners may reasonably require” risks introducing confusion, inconsistencies and delays into the process that could ultimately reduce the effectiveness of some of the positive Finance Act 2022 changes.
Conclusion
Finance Act 2022 introduces a number of positive changes to the R&D Tax Credit, including accelerating access to payable credits. You should now be reviewing your position in relation to your 2022 R&D Tax Credit claim and deciding whether this is to be prepared under pre or post Finance Act 2022 rules. For some companies, it may be beneficial to claim under existing rules (e.g. there are sufficient corporation tax liabilities against which the R&D Tax Credit can be offset). For other companies, preparing claims under the new rules will speed up access to cash which is always to be welcomed. As the Finance Act 2022 changes will have to be applied to all claims for accounting periods commencing on or after 1st January 2023, now is an opportune time for all R&D companies to get familiar with the new rules.
If you have any questions regarding your R&D Tax Credit and how the Finance Act 2022 changes may impact your claim, please do not hesitate to get in touch.