In the recent budget Minister Noonan announced the introduction of a new incentive scheme for companies engaged in Research & Development Activities in Ireland. Oddly he decided to call it the “Knowledge Development Box”
If you think this applies to your business, read on, if you are interested to see one of the methods large multinationals use to reduce Corporation Tax, read on, otherwise…….
Knowledge Development Box
The knowledge development box was designed to provide a new attraction for foreign direct investment, particularly as a number of other countries – notably the UK – have similar structures, generally known as patent boxes.
These types of arrangements offer companies tax relief based on the amount they spend on research and innovation. The relief effectively ensures that the profits flowing from the innovation are taxed at a lower rate than general corporate profits.
The Knowledge Development Box provides for an effective 6.25% corporation tax rate to income arising from copyrighted software and patented inventions, where some or all of the related R&D is undertaken by an Irish company.
The regime will be of most benefit to those companies that undertake significant R&D in Ireland.
Qualifying profits on which the relief can be claimed are intended to reflect the proportion that the company’s R&D costs bear to its overall expenditure on the qualifying asset, with some tweaks to reflect the agreed “Modified” nexus approach.
‘Qualifying expenditure on qualifying assets’ is a key driver of the calculation of the profits that qualify for the relief. The definition of this qualifying expenditure is broadly aligned to the definition of ‘expenditure on research and development’ for the purposes of the R&D tax credit.
In this regard, where a company develops, improves or creates a qualifying asset through qualifying R&D activities and the company makes R&D tax credit claims in relation this, the expenditure underpinning these claims should be broadly aligned to the ‘qualifying expenditure on qualifying assets’ for the purposes of the relief.
There is an exception to the above in terms of expenditure incurred by a company in engaging a third party to carry on R&D activities on behalf of the company.
Payments made to such third parties are regarded as qualifying expenditure for the purposes of calculating the relief whereas such payments are restricted for the purposes of the R&D tax credit.
Qualifying expenditure is calculated by reference to all qualifying expenditure on the qualifying asset incurred in the previous 4 years or, from 2020, all qualifying expenditure incurred after 1 January 2016.
Costs outsourced to affiliates or costs incurred on the acquisition of the IP are not regarded as qualifying expenditure, however, such costs are allowed as “uplift expenditure” up to a combined maximum of 30% of qualifying expenditure.
The tax relief provides for an allowance of 50% of the qualifying profits to be treated as a trading expense of the company, resulting in an effective 6.25% tax rate on such profits.
Qualifying assets are to be treated separately for the purposes of the KDB calculations. However, if a number of qualifying assets are so interlinked that it would be impossible to provide a reasonable allocation of income and expenses, then provision is made for using a “family of assets” and treating the combined assets as a qualifying asset.
Where an R&D tax credit claim has been utilised to shelter the corporation tax liability of a company for the current and preceding accounting periods and an excess credit still remains, a claim for monetisation of this excess credit can be made.
The Finance Bill provides that the KDB relief cannot increase the claim for monetisation of an excess R&D tax credit, therefore, the relief cannot be taken into account for the purposes of the monetisation calculations.
Where a company incurs a loss on the activities that qualify for the KDB relief, the loss would be available on a value basis against other profits.
I know this may sound complicated, but if your business currently claims R&D tax credits and the result of this R&D expenditure is an income generating asset, then you should be eligible.
For more help and advice on this and other topics then get in touch with Kilcoyne Accountants where one of our knowledgeable team will be happy to assist.