Firms risk losing R&D credits after reforms, tax expert warns

FIRMS that outsource research and development (R&D) operations risk losing out on valuable tax credits after changes to the way Revenue operates the scheme, according to a taxation expert.

Tax credits can be claimed for R&D expenditure paid to subcontractors. But the Finance Act 2019 introduced new legislation that requires notification to be given in advance of any payments being made by principal companies to subcontractors.

“Immediate action is required for many R&D tax credit claimants in order to protect their ability to claim outsourced R&D expenditure. Failure to take action will result in loss of R&D tax credits for 2020,” said Mark O’Sullivan, head of R&D technical services at BDO.

“In practical terms, this means that principal companies with relevant accounting periods (eg all December 31, 2020 year-end companies) must address this new requirement now, if they are engaging or paying subcontractors to carry out R&D activities on their behalf,” he said.

The new upfront notification requirement is likely to cause SMEs in particular administrative challenges and reduce credits being available for subcontractors to claim in Ireland, he added.

A Revenue concession was included as part of updated guidelines issued in March 2019, such that principal companies would not need to notify subcontractors who could not claim the R&D tax credit in Ireland — for example, foreign companies with no presence in Ireland.

“We would expect that this concession will continue to apply to the new notification requirement and that new Revenue guidelines will be issued in due course on this point,” said O’Sullivan.

“However, as no confirmation has been given to date on this, principal companies who wish to ensure that they are fully compliant might wish to apply this new notification requirement to all subcontractor payments — both Irish and non-Irish — until new guidelines are issued.”

The new rules could mean that companies may need to notify subcontractors before they are in a position to assess whether the R&D expenditure will qualify for tax credits.

“This is difficult for principal companies to assess at the initial point of engagement with the subcontractor, as the claim will only be completed after the accounting period in which the expenditure is incurred has ended,” said O’Sullivan.

“However, if the principal company has not issued notification before or at the time of payment, then they will not be able to include the amount in the claim, when completing this after the accounting period has ended.”