# R&D Tax Credit



## JudgeDread (6 Dec 2012)

Hi,

I am trying to work out our numbers for the R&D tax credit for 2011.

As a small software company it seems like almost everything we do applies.
I was under the impression that work we do as services would not be covered but that does not appear to be the case, as the revenue document clearly states you do not have to be the intellectual property owner of the R&D.

I have asked around friends in other companies as to how they calculate it and the answers range from they claim every penny of payroll expenditure (which seems wrong of course) to they don't claim at all for fear of an audit.

Has anyone any experience of this?


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## mandelbrot (6 Dec 2012)

I've got a lot of experience with this area - not claiming a credit as valuable as that for fear of being audited, is just nuts.

However, they might be the safer ones....

My understanding of the area is that there is very little qualifying R&D involved in software development -  developing software doesn't generally involve resolving a technological / scientific uncertainty, advancing the overall knowledge or capability in the field...

Generally at the outset of a software development project you know what it is you want to achieve and, more importantly, that it is achievable. How exactly you get there is the uncertainty, but that's not the same thing.


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## JudgeDread (6 Dec 2012)

Actually, I don't think thats the case. 

The revenue document states:
Experimental development means, "work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto".

So software does comply with that, in fact almost all software does.

Also it says:

A scientific or technological uncertainty may exist for one company although a competitor has resolved that uncertainty but retained the resulting knowledge as a trade secret or proprietary information.

The OECD Frascati Manual states “for software development to be classified as R&D, its completion must be dependent on the development of a scientific and/or technical advance, and the aim of the project must be resolution of a scientific and/or technical uncertainty on a systematic basis.

Also revenue state: Almost any software developed for sale is developed systematically and the uncertainties are systematically resolved (i.e., Technical Content).

So the only real question about our projects is whether there is a technology advancement but it does say above that you can advance in a way that is similar to a
competing product, so long as its not reasonably available elsewhere. So making a 
product, even one that has competitors, but you don't have access to the source code
, would be acceptable under that criteria.

So while you can't claim for a website you built, as its outcome is not in doubt, you could for building a software component that you are not sure can be completed.


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## mandelbrot (7 Dec 2012)

Sorry, I'm not convinced! And more importantly I don't think Revenue would be either in an audit situation. Audits and enquiries in relation to R&D tax credit claims will continue to increase, due to the value of the credit (particularly since it's a payable credit), and as the number & value of claims increase.

This is an area that really requires proper professional assistance if you're going to be claiming - to ensure that your claim is maximised on the one hand, and defensible and properly documented in the event of audit on the other hand.

Interesting article from KPMG here, who seem to be targeting this niche area... http://www.kpmg.com/IE/en/IssuesAnd...ent/RDTaxCreditsFlyerSoftwareElectronics2.pdf


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## Paddy199 (7 Dec 2012)

I have a software client and claim the R&D for them. Revenue asked us last year to send in the backup and they had no problem with it.

Just list the P&L items and allocate a % of it that is not R&D. We disallowed very little and Revenue were happy enough with it.


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## mandelbrot (7 Dec 2012)

Paddy199 said:


> I have a software client and claim the R&D for them. Revenue asked us last year to send in the backup and they had no problem with it.
> 
> Just list the P&L items and allocate a % of it that is not R&D. We disallowed very little and Revenue were happy enough with it.


 
AFAIK Revenue staff don't generally attempt to form a decision on the "Science test" requirements, unless the claim is clearly spurious (eg. a carpenter who performed "R&D" on a new technique for hammering nails...!).

The likelihood is they just looked at the computational elements of the claim by reference to the material explaining what activities were included as R&D, and the bases of apportionment.

That doesn't mean that a Revenue appointed technical expert in an R&D credit audit wouldn't disallow a substantial chunk of the activity as R&D.


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## Paddy199 (10 Dec 2012)

There is no ambiguity in the R&D claims I handle. As with all Revenue audits, Revenue will always challenge so you must be able to demonstrate the R&D element.

I think the original question was how to calculate it, not if he qualifies.


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## JudgeDread (11 Dec 2012)

Paddy199 said:


> There is no ambiguity in the R&D claims I handle. As with all Revenue audits, Revenue will always challenge so you must be able to demonstrate the R&D element.
> 
> I think the original question was how to calculate it, not if he qualifies.



Hi Paddy,

Thanks for the answers.

I guess that where my problem lies,  with software development, almost every project has some element of experimental development, and with the type of work we do there is mostly a doubt over the possibility of completing in the project as set out.

Its seems its a matter of having built the case. Its not really an accounting issue, the numbers are easy enough. I am just scared by the big number I am arriving at.


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## JudgeDread (11 Dec 2012)

Paddy199 said:


> I have a software client and claim the R&D for them. Revenue asked us last year to send in the backup and they had no problem with it.
> 
> Just list the P&L items and allocate a % of it that is not R&D. We disallowed very little and Revenue were happy enough with it.



Hi Paddy, 

Do you mind letting me know, what sort of % of the companies salaries was claimed as R&D? Roughly speaking.


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## mandelbrot (11 Dec 2012)

JudgeDread said:


> Hi Paddy,
> 
> Do you mind letting me know, what sort of % of the companies salaries was claimed as R&D? Roughly speaking.



That's a nonsense question and a surefire way to get yourself in trouble!

You have to decide which activities specifically were R&D and claim the specific amount of the salaries that related to that work. And if you look at pages 27-28 you'll see what records you'll need to have to support your claim.

You're 1 post away from being able to send/receive PMs by the way..!


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## JudgeDread (11 Dec 2012)

mandelbrot said:


> That's a nonsense question and a surefire way to get yourself in trouble!
> 
> You have to decide which activities specifically were R&D and claim the specific amount of the salaries that related to that work. And if you look at pages 27-28 you'll see what records you'll need to have to support your claim.
> 
> You're 1 post away from being able to send/receive PMs by the way..!



Hi Mandelbrot,

I don't think it is a nonsense question, we turn over about 700 to 800 k and having gone through the paperwork and calculations the R&D amount is running at about 350k.

Its simply that this seems to be a very high percentage to me. In previous years I didn't really understand the R&D tax credit I am sure I have significantly under claimed. 

We have several projects where experimental development took place, along with doubt as to the outcome. I know the advancement we sought, and I have time sheets and project reports throughout. However, I hadn't, previous to this year, seen some of these as included.

From talking to people about it I have found people completely ripping the credit off and others not claiming, thinking its only for bigger companies.


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## mandelbrot (11 Dec 2012)

JudgeDread said:


> Hi Mandelbrot,
> 
> I don't think it is a nonsense question, we turn over about 700 to 800 k and having gone through the paperwork and calculations the R&D amount is running at about 350k.
> 
> ...



Oh, looks like I was wrong about PMs kicking in at ten posts, apologies. 

All I can say to you is that Revenue are very active in this area and will become increasingly so. I'd strongly recommend getting professional advice in this area before claiming, so that you'll have some degree of comfort about your claim.

TBH if your current accountant/tax advisor hasn't the expertise to deal with it for you and been pushing to help you claim a very valuable credit, then you've probably got the wrong accountant.

And for the record I don't work in practice, so I'm not trying to tout for your business. I'd just be concerned that you start claiming a couple of hundred grand p.a. and when Revenue get around to examining your claims, and they will, that you could end up with an awful headache.

EDIT: the reason I said it was a nonsense question is because no 2 companies claims will be alike - R&D would be an area where every case is looked at on its own merits.


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## Paddy199 (11 Dec 2012)

Agree with mandlebrot. Get an tax adviser with experience in this area to do the claim. The credit is there for genuine claims - make sure you get it if you are entitled to it.


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## T McGibney (12 Dec 2012)

mandelbrot said:


> TBH if your current accountant/tax advisor hasn't the expertise to deal with it for you and been pushing to help you claim a very valuable credit, then you've probably got the wrong accountant.


... or you (and your accountant) may need to engage a specialist consultant to advise, or provide a second opinion, on the R&D credit claim. Even if your accountant is vastly experienced and highly confident on this topic, this is still a prudent option. It will cost a bit, but this should be small in the context of the value of the claim.


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## mandelbrot (12 Dec 2012)

T McGibney said:


> ... or you (and your accountant) may need to engage a specialist consultant to advise, or provide a second opinion, on the R&D credit claim. Even if your accountant is vastly experienced and highly confident on this topic, this is still a prudent option. It will cost a bit, but this should be small in the context of the value of the claim.


 
Good point, thanks Tommy - but even if if the accountant doesn't feel competent/confident to compile the claim, they still should be suggesting it to the OP!


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## selfassessed (18 Dec 2012)

mandelbrot said:


> My understanding of the area is that there is very little qualifying R&D involved in software development -  developing software doesn't generally involve resolving a technological / scientific uncertainty, advancing the overall knowledge or capability in the field...



I'm sorry, but that's a silly generalisation.  Of course software development does pass the science test in a great many cases and is filled with as much risk and uncertainty as any other development process.

If Google developed a new search engine would you disallow a tax credit claim because it is written in software?

If Ford develops a new engine management system for cars that halves CO2 emissions but uses firmware to do it is that disallowed too?



mandelbrot said:


> Generally at the outset of a software development project you know what it is you want to achieve and, more importantly, that it is achievable. How exactly you get there is the uncertainty, but that's not the same thing.



You do know what you want to achieve but not that it can be achieved.  I don't know if it is possible to create an algorithm to solve a specific problem until I try.  I don't see that as being any different from creating a new cancer treatment drug.


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## mandelbrot (18 Dec 2012)

selfassessed said:


> I'm sorry, but that's a silly generalisation. Of course software development does pass the science test in a great many cases and is filled with as much risk and uncertainty as any other development process.
> 
> If Google developed a new search engine would you disallow a tax credit claim because it is written in software?
> 
> ...


 
I don't think I was clear enough in what I said earlier, what I meant was that in software development while there may be an element of R&D, only a relatively small proportion of the overall activity is actually novel R&D - as you say finding the new algorithm would be R&D, but then wrapping that up in your piece of software is largely not R&D.


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## selfassessed (18 Dec 2012)

mandelbrot said:


> I don't think I was clear enough in what I said earlier, what I meant was that in software development while there may be an element of R&D, only a relatively small proportion of the overall activity is actually novel R&D - as you say finding the new algorithm would be R&D, but then wrapping that up in your piece of software is largely not R&D.



But you could say that about any R&D activity.  My understanding is the R&D tax credit is project based not task based.  i.e. you don't simply isolate one or two small tasks that are novel - you include the whole project.


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## mandelbrot (18 Dec 2012)

selfassessed said:


> But you could say that about any R&D activity.  My understanding is the R&D tax credit is project based not task based.  i.e. you don't simply isolate one or two small tasks that are novel - you include the whole project.



It is project based, but not necessarily 100% of a software development project will qualify - there would/should generally be an apportionment.


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## T McGibney (19 Dec 2012)

mandelbrot said:


> It is project based, but not necessarily 100% of a software development project will qualify - there would/should generally be an apportionment.



This confuses me. Either the project is an R&D project or it's not, even if it includes some run-of-the-mill tasks. I don't understand the 'apportionment' argument and I haven't heard it raised before by experts on this topic. I hope Revenue aren't trying to move the goalposts on this useful tax credit.


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## mandelbrot (19 Dec 2012)

T McGibney said:


> This confuses me. Either the project is an R&D project or it's not, even if it includes some run-of-the-mill tasks. I don't understand the 'apportionment' argument and I haven't heard it raised before by experts on this topic. I hope Revenue aren't trying to move the goalposts on this useful tax credit.



Not as far as I know. If you're a commercial entity your R&D may be carried out with a view to getting a new product on the Market.

In manufacturing industries, which are what I'm most familiar with, the R&D would be in the area of engineering and materials science, and generally once you have a fully functioning prototype which encompasses the resolved scientific/technological uncertainties, then the R&D phase has ended, but the product will not be ready for mass production.

The cost of the plant & equipment used for developing the prototype will be allowable R&D, but if it is then used for production its cost needs to be apportioned to reflect its R&D usage as a % of its total life.

My point is that the question is when does the R&D activity end, and afaik the answer is generally long before you have a product to Market.


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## T McGibney (19 Dec 2012)

mandelbrot said:


> In manufacturing industries, which are what I'm most familiar with, the R&D would be in the area of engineering and materials science, and generally once you have a fully functioning prototype which encompasses the resolved scientific/technological uncertainties, then the R&D phase has ended, but the product will not be ready for mass production.
> 
> The cost of the plant & equipment used for developing the prototype will be allowable R&D, but if it is then used for production its cost needs to be apportioned to reflect its R&D usage as a % of its total life.
> 
> My point is that the question is when does the R&D activity end, and afaik the answer is generally long before you have a product to Market.



Again, (and apologies for labouring the point), I'm a little confused by this.  R&D credit may be claimed in respect of capital expenditure. I don't really see the relevance of restricting this in the case of a prototype machine that is later used in a production process.


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## Paddy199 (19 Dec 2012)

I wonder is there confusion here on accounting for R&D and the tax credit for R&D?


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## selfassessed (19 Dec 2012)

mandelbrot said:


> Not as far as I know. If you're a commercial entity your R&D may be carried out with a view to getting a new product on the Market.
> 
> In manufacturing industries, which are what I'm most familiar with, the R&D would be in the area of engineering and materials science, and generally once you have a fully functioning prototype which encompasses the resolved scientific/technological uncertainties, then the R&D phase has ended, but the product will not be ready for mass production.
> 
> ...



Perhaps that's where the confusion arises.  Obviously manufacturing, production and distribution are not R&D activities.  But for software these activities often don't exist at all.  Copying a CD is about as much manufacturing as gets done and in these days of web distribution that isn't even necessary.  Creating the web site is not an R&D activity but creating the application to be hosted there is because on software, the "fully functioning prototype" is the actually finished product?


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## mandelbrot (20 Dec 2012)

T McGibney said:


> Again, (and apologies for labouring the point), I'm a little confused by this.  R&D credit may be claimed in respect of capital expenditure. I don't really see the relevance of restricting this in the case of a prototype machine that is later used in a production process.



Well the capital asset is bought for use over a lengthy period - lets say you decide to buy an expensive piece of equipment that can also be used in your existing production process, but for the first 6 months of it's expected useful life of 10 years you're going to use it primarily for an R&D project.

It would hardly be fair to your competitors that you effectively get a state subsidy amounting to 23.75% of the cost of what is ultimately production equipment rather than R&D equipment.

http://www.revenue.ie/en/tax/ct/leaflets/research-dev.pdf
 "Expenditure on research and development, in accordance with S766 TCA 1997, includes expenditure on plant and machinery. However where plant and machinery which is used for R&D and other purposes form part of the claim, the cost of the plant and machinery should be apportioned on a just and reasonable basis.
If an apportionment that has already been made in this manner is later shown not to be “just and reasonable” a revised apportionment must be made. The new apportionment then supersedes the previous apportionment. The revised apportionments may give rise to an underpayment or overpayment of corporation tax."


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## T McGibney (21 Dec 2012)

mandelbrot said:


> Well the capital asset is bought for use over a lengthy period - lets say you decide to buy an expensive piece of equipment that can also be used in your existing production process, but for the first 6 months of it's expected useful life of 10 years you're going to use it primarily for an R&D project.
> 
> It would hardly be fair to your competitors that you effectively get a state subsidy amounting to 23.75% of the cost of what is ultimately production equipment rather than R&D equipment.
> 
> ...



But we're talking here about developing a prototype, not buying an expensive machine? I don't really see your point in relation to "state subsidy" as the entire raison d'être of the R&D credit in the first instance is to confer a competitive advantage to the recipient.


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## mandelbrot (21 Dec 2012)

T McGibney said:


> But we're talking here about developing a prototype, not buying an expensive machine? I don't really see your point in relation to "state subsidy" as the entire raison d'être of the R&D credit in the first instance is to confer a competitive advantage to the recipient.


 


T McGibney said:


> But we're talking here about developing a prototype, not buying an expensive machine? I don't really see your point in relation to "state subsidy" as the entire raison d'être of the R&D credit in the first instance is to confer a competitive advantage to the recipient.


 
In lots of cases the same P&M can/will be used for the R&D activity as for production - in some cases one of the outcomes of the R&D process is some degree of modification/reconfiguration of P&M for future production.

Not trying to be smart, but I don't really see how you can't really see my point about the state subsidy comment, but I'll try once more to illustrate it: Lets say I've got an expensive production-line machine with a replacement cost of €2m, nearing the end of its useful life. So I decide to buy a new €2m machine, and its first use will be in a genuine R&D project for the next couple of months, and after that it will be used for production for the next ten years, regardless of the outcome of the R&D.

Do you think it's justifiable for the state to give that company nearly €500k back for what is effectively a piece of production equipment? The cost of the couple of months labour and materials in the R&D project would probably be only a small fraction of the cost of the capital asset. To me it seems wholly reasonable and fair that you would only get the R&D credit proportionate to the use of the asset in R&D activities. Your competitive advantage is that you are effectively being subsidised to spend money on R&D, to the extent that the money spent relates to R&D.


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## T McGibney (21 Dec 2012)

mandelbrot said:


> Lets say I've got an expensive production-line machine with a replacement cost of €2m, nearing the end of its useful life. So I decide to buy a new €2m machine, and its first use will be in a genuine R&D project for the next couple of months, and after that it will be used for production for the next ten years, regardless of the outcome of the R&D.



Would such expenditure attract R&D credit in the first instance?  If the R&D project is a temporary one, I would have though that this would imperil the allowability of the credit in respect of capital expenditure which would by its nature relate to long-term use.


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## mandelbrot (21 Dec 2012)

T McGibney said:


> Would such expenditure attract R&D credit in the first instance? If the R&D project is a temporary one, I would have though that this would imperil the allowability of the credit in respect of capital expenditure which would by its nature relate to long-term use.


 
Ah now that's a horse of a different colour! 

Under the legislation I don't see how you could be denied the credit just because the R&D usage of the capital asset was for a relatively short duration.


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