Accounting treatment of R & D tax credit

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callybags

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The system basically works like this:

You can get a credit against your corporation tax liability for qualifying R & D expenditure over and above the expenditure incurred in 2003 ( The base year)

You get a credit of 25% direct against the tax liability.

My question is- how is this to be treated in the accounts?

If it is credited to the P & L account, then it will increase the CT liability, effectively reducing the credit to 12.5%.
 
As it's a credit against corporation tax rather than profit, surely it should hit the tax account rather than the P & L?
 
That is what I thought but I cannot seem to get a definitive answer.

It is also the case that if there is insufficient corporation tax liability, then the credit can be offset against PAYE and PRSI paid in the year. This is a direct cash refund from revenue.

I might give the revenue a call.
 
callybags said:
That is what I thought but I cannot seem to get a definitive answer.

It is also the case that if there is insufficient corporation tax liability, then the credit can be offset against PAYE and PRSI paid in the year. This is a direct cash refund from revenue.

I might give the revenue a call.
Click to expand...

For accounting periods commencing on or after 1 January 2009, a refund mechanism does exist for a company with (say) no corporation tax liability and qualifying expenditure incurred during the accounting period.

The refund a company can claim is limited to the greater of the corporation tax paid by the company for its preceding 10 accounting periods or the company's payroll tax liability (i.e. PAYE/PRSI) for the accounting period during which the qualifying expenditure is incurred.

The steps involved are as follows:

1) The 25% credit is first offset against the corporation tax liability (if any) for the accounting period during which the qualifying expenditure is incurred.

2) Any excess should then be carried back for offset against the corporation tax liability (if any) for the preceding accounting period.

3) Any excess may then be refunded to the company in 3 instalments.

4) The first instalment should amount to 33% of any excess.

5) Any remaining balance should be then used to reduce the corporation tax liability (if any) for the next accounting period.

6) A second instalment of 50% of any remaining excess may then be refunded to the company.

7) Any remaining balance should then be used to reduce the corporation tax liability (if any) for the following accounting period.

8) Any remaining excess may then be refunded to the company.

I hope the above is of assistance to you.
 
Thanks, Pat. That's a fairly clear summary.

However, the question still remains as to the accounting treatment.

The case I have is where the credit will be offset against PAYE/PRSI ( No corporation tax has been paid nor will for a few years due to losses forward)

As this is a direct credit against a P & L expense, I suspect it will hsve to be added back to profits (or reduce losses) in the CT computation and eventually 50% of the credit will be clawed back in corporation tax.
 
callybags said:
Thanks, Pat. That's a fairly clear summary.

However, the question still remains as to the accounting treatment.

The case I have is where the credit will be offset against PAYE/PRSI ( No corporation tax has been paid nor will for a few years due to losses forward)

As this is a direct credit against a P & L expense, I suspect it will hsve to be added back to profits (or reduce losses) in the CT computation and eventually 50% of the credit will be clawed back in corporation tax.
Click to expand...

It's not a direct credit against a P & L expense. The PAYE/PRSI "ceiling" exists to prevent companies that don't create employment from benefitting from the concession. The two aren't otherwise linked (i.e. the credit's not a refund of PAYE/PRSI). The refund is applied for when the company submits its corporation tax return(s) for the relevant period(s). And it's not taxable as income so intuitively you wouldn't treat it as "reducing" an expense. For companies which generate a taxable trading profit, it's an effective 37.5% credit (as the company should get its basic trading deduction anyway).

I don't see how 50% of the credit will be clawed back in corporation tax? Take a company which consistently generates tax adjusted trading losses, has a 31 December year end, commenced trading during 2004 and incurred qualifying expenditure of €400,000 during FY09:

Assuming its payroll tax liability for FY09 is €100,000 or more, it should receive the following refunds:

€33,000 when the company submits its corporation tax return for FY09 (i.e. on or before 21/23 September 2010),

€33,500 when the company submits its corporation tax return for FY10 (i.e. on or before 21/23 September 2011), and

€33,500 when the company submits its corporation tax return for FY11 (i.e. on or before 21/23 September 2012).

The Collector General may agree to offset an "R & D refund" against a PAYE/PRSI liability as part of a separate arrangement, but beyond that and the "rule" outlined above the two are not linked.
 
For the accounting treatment -- Under Irish GAAP the Credit can be taken to EBIT or the tax line. the benefit of taking it to EBIT, for example reducing your R&D expense is that it improves your earnings per share.
 
I remember coming across an ICAI document in which the authors outlined the idea of treating the R&D credit as a government grant =>

Debit CT liability account
Credit Government grant (income) account

with the amount of the recognised credit for the period.
 
deadlyduck said:
I remember coming across an ICAI document in which the authors outlined the idea of treating the R&D credit as a government grant =>

Debit CT liability account
Credit Government grant (income) account

with the amount of the recognised credit for the period.
Click to expand...

Yes- that is allowed too
 
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