Advance notice of R&D credit claims adds admin burden to stretched SMEs
Finance Bill 2019 has brought some welcome, and some not so welcome, changes to the research and development (R&D) tax credit regime in Ireland.
The headline positives include increasing the overall claimable amount for small and micro enterprises to 30pc, the introduction of an enhanced method to calculate the payable element of the R&D tax credit based on payroll liabilities, and the ability to claim R&D tax credits on pre-trading expenditure.
These new provisions should improve firms' cashflow, which will provide support for small and micro companies at a stage when it is most needed.
However, the Finance Bill also brought with it an amendment that was unexpected, and which appears to be a highly impractical, burdensome, and an unfairly restrictive addition to the R&D tax credit regime in Ireland.
The amendment requires claimant companies to notify subcontractors in advance of every payment where they might be claiming the R&D tax credit on that payment.
This is problematic as, in many cases, it will be impossible to determine whether payments to subcontractors will actually form part of a company's R&D tax credit claim at the time of the payment.
Where a company outsources R&D activities to a third-party company, either, but not both, of the companies can include the cost of the R&D activities in their R&D tax credit calculation. Historically, the mechanism to prevent both companies claiming credit for the same activities was a notification procedure, whereby it was necessary for the company that had outsourced activities to write to the subcontractor to indicate their intention to claim on the activities.
Where such notification was received, the subcontractor was then not allowed to make an R&D tax credit claim in relation to these activities. In the absence of receiving such notification, the subcontractor was free to claim for the costs of the activities in their R&D tax credit claim.
Earlier this year, the March 2019 guidelines advised that it was no longer a requirement to notify non-Irish subcontracted entities.
This was a welcome clarification that acted to prevent a number of needless notifications to companies who would not be in a position to make a similar R&D tax credit claim in Ireland.
Unfortunately, the administrative relief provided for in the March 2019 guidelines has been followed by the introduction of this administratively burdensome 'advanced notification requirement' in the current draft of the Finance Bill.
The complications presented by this new earlier notification process are two-fold.
Firstly, as referenced above, it places an additional administrative burden on companies, something which cannot be considered welcome in a regime that is often criticised for its heavy administration requirements.
Small and medium companies in particular can be deterred from making a claim, as they do not have the resources to undertake the administrative work that Revenue currently expects.
Additionally, as third-party subcontractor costs are restricted to 15pc of a company's internal spend, the requirement to notify subcontractors upfront will likely lead to subcontractors needlessly being informed of a potential claim that is to be made by the other party - whereby at the end of the financial year, these amounts would be restricted to 15pc by the other party and thus not claimed at all.
Large companies are more likely to have the resources to plan this, leading to unnecessary limits being put on the ability of some SMEs to make claims they should be eligible to make.
This change could lead to a situation where factually incorrect statements are being submitted in writing from one claimant company to another - wherein a claimant (a subcontractor) has incorrectly been advised that another company has claimed R&D tax credits in respect of work the subcontractor company has carried out.
We at BDO believe that this new proposed subcontractor notification requirement will also lead to an unintentional restriction on the amount of R&D tax credits that are available to subcontracting R&D entities in Ireland.
We would strongly recommend that this proposed amendment be reconsidered and a consultation process be adopted to help avoid the unintentional pitfalls listed here.
An alternative suggestion is that where notification is received after the subcontractor has made a claim, the subcontractor must restrict any future claims to take account of this amount, so that Revenue can recoup the double payment.
This would act to minimise double-counting without adding a major administrative burden. The subcontractor would have the opportunity to liaise with the other claimant company to enquire as to how much of this amount has been included in that other company's claim.
It would also ensure that subcontractors would not have to go back and amend claims, but rather make the adjustment in future claims.
It is clear that the Government is taking steps to make the R&D tax credit regime more attractive to small and micro companies.
However, consideration needs to be given to whether increasing the administrative burden placed on these companies, who are typically least equipped to devote resources to this, may act as too great a deterrent to claiming R&D tax credits, despite the additional benefits available.
Mark O'Sullivan is head of R&D technical services at BDO Ireland