Session 13: Specified Intangible Assets and Research & Development

Specified Intangible Assets (SIA) - Session 13.1

• The study of Specified Intangible Assets (SIA) at the CAP 2 level builds upon the foundation of adjusted profit computations from CAP 1.

• In CAP 1, students learned that depreciation calculated in financial accounts is not an allowable expense and must be added back in adjusted profit computations. For tangible assets (Plant & Machinery), Revenue applies its own depreciation rules known as Wear & Tear (W&T).

• For intangible assets (e.g., Patents), CAP 1 provided a choice between claiming amortisation per the accounts or a fixed write-down over $15\,years$ at a rate of $7\%$ per annum for the first $14\,years$ and $2\%$ in the final year.

Scope and Eligibility of the SIA Scheme

• Tax relief is available for capital expenditure incurred on the acquisition of intangible assets specifically for the purposes of a trade.

• To qualify, assets must meet two criteria:

  • They must be recognised as intangible assets under Generally Accepted Accounting Principles (GAAP).

  • They must be listed as Specified Intangible Assets (SIA) in the legislation.

• Listed Specified Intangible Assets include:

  • Patents.

  • Trademarks.

  • Brands.

  • Copyrights.

  • Know-how.

  • Goodwill, but only to the extent that it relates closely to the categories of intangible assets listed above.

• If expenditure is incurred before trading commences, the relief is allowed when the relevant trade actually starts.

Capital Allowances and Writing Down Allowance (WDA)

• The Writing Down Allowance (WDA) can be calculated using one of two methods:

  1. The standard accounting treatment: The actual amortisation charge as included in the Income Statement (IS).

  2. Fixed period write-down: Over $15\,years$ at a rate of $7\%$ per annum for $14\,years$ and $2\%$ in the residual year.

• On the disposal of a SIA, normal Balancing Allowance (BA) and Balancing Charge (BC) rules generally apply.

• Exception to Clawback: There is no clawback (Balancing Charge) where a SIA, acquired before $14\,Oct\,2020$, is disposed of more than $5\,years$ after the beginning of the accounting period in which the asset was first provided.

• Connected Company Transfers: If a SIA is disposed of to a connected company, the subsequent claim for the purchaser is based on the lower of:

  1. The price actually paid for the asset.

  2. The allowances that were not yet claimed by the previous owner.

Relevant Trade (RT) and the 80% Restriction

• Relief for SIA is strictly targeted at trading activity where the asset is used. This is defined as a 'Relevant Trade' (RT).

• A Relevant Trade consists of:

  • Managing, developing, or exploiting intangible assets.

  • Activities consisting of the sale of goods or services that derive the greater part of their value from the intangible assets, or whose value is increased by the usage of those assets.

• For expenditure incurred after $11\,October\,2017$, there is a cap on relief. The aggregate of capital allowances and related interest expense claimed in any accounting period may not exceed $80\%$ of the relevant trading income for that period.

• Calculation of the Restriction:

  • The 'Relevant Trading Income' must be calculated BEFORE claiming the amortisation and before interest on borrowings used to fund the SIA acquisition.

  • To find the starting figure for the $80\%$ calculation, one must adjust the Profit of the RT (per the accounts) by adding back the amortisation and the interest associated with the SIA.

Exam Strategy: Reading the Question

• Carefully check the provided profit figures:

  • Case A (Billy Ltd): If the figure is described as being 'after adding back the interest and amortisation,' there is no need to make further adjustments to calculate the $80\%$ cap.

  • Case B (Samsa Ltd): If the figure is 'arrived at after a charge for amortisation and interest,' these values must be added back to establish the correct base for the $80\%$ restriction.

• Interaction with Stamp Duty: Qualifying intellectual property is exempt from stamp duty. The definition of intellectual property for WDA on SIA is identical to the definition used for stamp duty purposes.

Research & Development (R&D) Introduction - Session 13.2

• The Research and Development tax credit is a significant incentive for companies within the charge to Irish Corporation Tax (CT) that undertake R&D within the EEA.

• The credit rate is $30\%$ (recently increased from $25\%$) of qualifying R&D expenditure.

• There is no minimum spend requirement and no upper limit on qualifying expenditure.

• Double Benefit: R&D expenditure reduces the CT bill twice:

  1. As an expense deduction from trading profit, saving $12.5\%$.

  2. As a tax credit against the final CT liability, saving $30\%$.

  3. The total effective saving is $42.5\%$ ($12.5\% + 30.0\%$).

Qualifying Entities and Activities

• A qualifying company is one that carries on a trade itself, is a $51\%$ subsidiary of a trading company, or is a member of a trading group.

• Mandatory Requirements:

  • The company must carry out actual R&D activities.

  • It must maintain meticulous records of R&D activity.

  • Separate records are required if R&D is conducted in different geographical locations.

• Qualifying R&D Activities must involve systematic, investigative, or experimental activity in Science or Technology, falling into one of three categories:

  1. Basic Research.

  2. Applied Research.

  3. Experimental Development.

• The activity must seek to achieve a scientific or technological advancement and involve the resolution of a scientific or technological uncertainty.

• Note: R&D does not have to be successful to qualify for the credit.

Qualifying R&D Expenditure Details

• Expenditure must be incurred wholly and exclusively (W&E) in the carrying on of R&D activity. Indirect costs (e.g., admin staff wages) are excluded.

• Expenditure types allowed:

  • Trading expenses or charges.

  • Capital allowances on Plant and Machinery (P&M). P&M used partially for R&D can be apportioned (e.g., $40\%$ of an item used $40\%$ of the time for R&D).

  • Scientific research allowance.

• The company does not necessarily have to hold the resulting IP rights.

• Grants: Qualifying expenditure must be calculated net of any grants received.

• International Groups: Cost-sharing contributions from other companies in an international group are ignored; the gross expenditure on R&D qualifies for the Irish credit.

• Interest: Interest payments do not qualify as R&D expenditure for the credit, though they may qualify as a standard CT deduction at $12.5\%$.

Subcontracting and Outsourcing Rules

• A company can claim credit for R&D it did not perform itself in two specific scenarios:

  1. Sums paid to a university or institute of higher education: The limit is the higher of $15\%$ of non-outsourced R&D expenditure or $€100,000$.

  2. Sums paid to a non-connected person: Same limit applies (higher of $15\%$ of internal spend or $€100,000$). The company must notify the subcontractor in advance that the company intends to claim the credit, which precludes the subcontractor from claiming the credit for the same work.

R&D Buildings and Groups

• Qualifying Buildings: Expenditure on construction, reconstruction, repair, or renewal qualifies (net of grants). The cost of the site is excluded.

• A building must qualify for industrial building allowances, and at least $35\%$ of its use over a specified $4\,year$ period must be for R&D purposes.

• R&D Groups: Companies are grouped if one is a $51\%$ subsidiary of another or both are $51\%$ subsidiaries of a third entity. Group members can allocate R&D expenditure as they wish to Irish resident companies/branches but must notify Revenue.

• Trade Transfers: If a trade is merged/transferred, the successor company can claim remaining tax refunds if both were in a CT group at the time and the successor continues the R&D for at least $2\,years$.

Rewarding Key Employees

• Companies can surrender all or part of their R&D credit to reward key employees.

• The employee applies the credit in the year following the surrender to reduce their Income Tax (IT), but only down to a minimum effective rate of $23\%$. Unused excess is carried forward.

• Criteria for 'Key Employee':

  • At least $50\%$ of their emoluments must qualify as R&D expenditure.

  • At least $50\%$ of their duties must involve the conception or creation of new knowledge, products, processes, methods, or systems.

  • Specifically excludes Directors and shareholders owning $≥5\%$ of the company (or associated companies).

Claiming the Tax Credit and Clawback - Session 13.3

• Pre-notification requirement (FA 2023): Companies claiming for the first time or after a $3\,year$ hiatus must notify Revenue $90\,days$ before making a claim.

• Claims must be made within $12\,months$ of the accounting period end.

• The credit can be offset against tax payable (treated as an overpayment) or claimed as a cash refund.

• Payment occurs in three instalments:

  1. Instalment 1: Greater of (full R&D tax credit up to $€75,000$) OR ($50\%$ of the credit in the year of claim).

  2. Instalment 2: $60\%$ of the remaining balance, paid $12\,months$ after the first claim.

  3. Instalment 3: The final balance, paid $12\,months$ after the second claim.

• Cash Flow Strategy: It is advantageous to claim R&D expenditure (Section 766C) and R&D Buildings (Section 766D) separately. This allows the company to apply the $€75,000$ floor separately to each claim, potentially increasing the first instalment total compared to a combined claim.

Clawbacks and Penalties

• If a building/structure that qualified for the credit is sold or ceases to be used for R&D (or the same trade) within $10\,years$ (the 'specified relevant period'), the credit is clawed back.

• Mechanism: Clawback is assessed as Case IV income at four times ($4\times$) the credit granted, taxed at $25\%$.

• For deliberate false or overstated claims involving key employees, the clawback is eight times ($8\times$) the credit surrendered.

• No reliefs (e.g., loss relief) can be used to reduce the tax due on a clawback assessment.

• Such Case IV income is ignored for Close Company Surcharge purposes. Normal penalties and interest apply for non-compliance.