Finance (No. 2) Bill 2023 (“the Bill”) was published yesterday, 19th October 2023, to implement the Budget 2024 taxation changes recently announced by Minister for Finance Michael McGrath. As expected, the Bill contains further details relating to the positive changes to the R&D Tax Credit announced on Budget Day, namely the increase in the rate to 30% and the doubling of the first instalment threshold amount.
However, the Bill goes further and introduces a number of other changes that were not mentioned in the Budget Day speech. Most notably, pre-notification requirements are to be introduced in Ireland for the first time. These will apply to first time claimants and to companies which have not made an R&D Tax Credit claim for any of 3 years preceding the period covered by the claim they are seeking to submit.
We will now take a closer look at the specifics of the R&D Tax Credit measures as outlined in the Finance Bill.
1. Increase in R&D Tax Credit Rate
The announcement that the R&D Tax Credit rate is to increase from 25% to 30% was well received by R&D performing companies in Ireland. This change acknowledges the pivotal role played by the tax credit in supporting innovative businesses. As stated by Minister McGrath on Budget Day:
"The Research and Development (R&D) Tax Credit is a crucial feature of Ireland’s corporation tax offering and enables us to remain competitive in attracting quality employment and investment in R&D.”
It has now been confirmed in the Finance Bill that the increase in the R&D Tax Credit will apply for accounting periods commencing on or after 1st January 2024 e.g. 2024 R&D Tax Credit claims being made in 2025.
2. Increase in the First Instalment Threshold Amount
Another positive change announced on Budget Day was the increase in the first instalment threshold amount to €50,000, up from the previous €25,000.
Following this change, the first instalment available to a company will be the greater of A) €50,000 (or if lower, the amount of the credit claimed), or B) 50% of the amount of the credit claimed.
Therefore, a company with an R&D Tax Credit of €50,000 or less will receive the full tax credit in the first instalment.
Again, it is confirmed in the Finance Bill that this change will apply in respect of accounting periods commencing on or after 1 January 2024.
3. New R&D Tax Credit Pre-Notification Requirements
A significant change that was not announced on Budget Day but has been included in the Finance Bill is the introduction of the new pre-notification requirements. These will apply to first-time claimants and companies that have not claimed the credit in any of the three years preceding the accounting period for which a claim is being made.
These new requirements state that at least 90 days before a claim is made, the company must notify Revenue that it intends making a claim. This has to be done in a form prescribed by Revenue and the information to be provided includes:
- the name, address and corporation tax number of the company,
- a description of the research and development activities carried out by the company,
- the number of employees carrying on research and development activities, and
- details of expenditure incurred by the company on research and development activities which has been or is to be met directly or indirectly by grant assistance or any other assistance.
A pre-notification requirement has also been added to S766D TCA 1997 (i.e. the section dealing with expenditure on R&D buildings and structures). Again, at least 90 days before making a claim under this section, a company will have to notify Revenue of their intention to make a claim and provide certain information, including:
- the name, address and corporation tax number of the company,
- confirmation that the building or structure is a qualifying building,
- the proportion of the qualifying building which is to be used for the purpose of the carrying on by the company of research and development activities, and
- details of expenditure incurred by the company which has been or is to be met directly or indirectly by grant assistance or any other assistance.
The introduction of these pre-notification requirements represents a radical change to the R&D Tax Credit in Ireland.
In our view, the timing of these changes is unfortunate given that simplifying access to the R&D Tax Credit, particularly for SMEs, has increasingly been recognised as a priority issue in recent years (e.g. see the Commission on Taxation and Welfare Report, Foundations for the Future)
4. Reporting of R&D Tax Credit amounts carried forward
S766C TCA 1997 has been updated to confirm that in addition to the other details required by subsection (9)(b) (e.g. expenditure on P&M, employee emoluments etc.), companies will also have to provide details of R&D Tax Credits carried forward from prior years where the tax credits are only available for offset against corporation tax.
This relates to amounts carried forward where the R&D Tax Credit in the prior year exceeded the maximum payable credit allowed for the claim (i.e. due to the application of the S766B restrictions).
This requirement applies to accounting periods ending on or after 31st December 2023 i.e. companies need to include this information on their 2023 CT1s and going forward.
5. Other Measures
Other measures introduced in the Finance Bill, include:
- Confirmation that the rules contained in S766 TCA 1997 regarding the treatment of expenditure on Plant and Machinery (e.g. the requirement to apportion costs where the P&M will not be used wholly and exclusively for the purposes of R&D), also apply to claims made under S766C TCA 1997.
- The introduction of measures to enable companies that have claimed under sections 766C and 766D and that subsequently cease trading to effectively transfer unused tax credits to another company that commences to carry on the trade and the R&D activities. Certain condition must be satisfied for this transfer of unused tax credits to be allowed. For example, both companies must be members of the same group when the cessation/commencement event occurred.
- A new section has been added to confirm that nothing in S766C shall prevent the Revenue Commissioners from examining a claim subsequent to any payment or offset having been made and making or amending an assessment.
Conclusion
Finance (No. 2) Bill 2023 introduces significant changes to the R&D Tax Credit, some favourable and others that will require careful implementation and close monitoring to ensure they do not have unintended, adverse impacts on R&D performing companies.
The Finance Bill will now continue its passage through the Oireachtas, with the aim of having it enacted by the 31st December 2023.
If you have any question regarding the Finance Bill changes outline above and how they may impact your R&D Tax Credit claims, please do not hesitate to get in touch at 0877582744 or email us at eoinbrennan@scimetrnd.com or fill in our contact form here