R&D tax breaks available, but many SMEs are missing out

31 Mar 2009

Irish SMEs have been urged to examine their activities to see if they qualify for research and development (R&D) tax credits.

“At a time when many companies are being impacted by reduced cash flows, it is worthwhile examining all activities to see if they qualify for grant aid or tax exemptions. In particular, the definition of what can be termed R&D is broader than most businesspeople realise, and tax credits are not being claimed due to this lack of awareness,” said Dónall Curtin of the Institute of Certified Public Accountants in Ireland (CPA) and partner in Byrne Curtin Kelly.

According to Curtin, R&D is defined as “systematic, investigative or experimental activities in a field of science or technology, being basic research, applied research or experimental research.

“The key provision to be satisfied in order to qualify for R&D tax credits is that the relevant activity must seek to achieve scientific or technological advancement, and involves the resolution of scientific or technological uncertainty,” he said.

“Conventional wisdom suggests that those undertaking R&D wear white coats and work in labs. This is not the case. Many businesses and firms have undertaken the development of their own internal IT systems, either as part of mainstream development or as part of their effort to improve processes and operations. If a business can demonstrate an IT advance that is a departure from conventional knowledge, then this may be eligible for tax credits.”

Potentially eligible IT activities include: integration of telephony and voice technologies; smartcard interfacing with other devices; integration of mobile technologies such as pen-pad or mobile phones; or improvement in processes and operations or automation of manual activities.

“Software development often focuses on improving current processes and/or improving legacy systems in line with current working practices and legislation. This can create challenges which the IT development teams must overcome by formulating an advanced solution to a specific problem. If this has occurred in the business, it is likely that these IT development activities could be categorised as R&D, and may qualify for tax credits”, Curtin explained.

“Claiming tax credits can be of huge benefit to a business and can make significant reductions in tax liabilities. The key point is that it doesn’t have to be successful. Once the intention is to achieve advancement or to remove uncertainty, then a company is entitled to claim tax credit for the activity being undertaken.”

To support the claim, Curtin said proper records must be maintained with sufficient evidence including a description of the project and its purpose; a feasibility plan or methodology adopted; status or progress reports; problems encountered that identified areas of technological uncertainty and experimental development; personnel involved in the project; notebooks, lab reports; and any patents or patent applications.

“I would urge all SMEs to review their activities and consult their financial advisers to claim any R&D tax credits for which they might be eligible. This could range from improving plant performance/energy efficiency, to developing a new product/improving an existing product, or using universities or external experts to assist developments in the business.”

By Jennifer Yau