qualifying allowable expenditure

Revenue published Tax and Duty Manual Part 29-02-03 – Research and Development (R&D) Tax Credit today.

These updated guidelines clarify Revenue’s treatment of rental expenditure as well as including information on the treatment of subsidies received under (i) the Temporary Wage Subsidy Scheme (TWSS) and (ii) the Employment Wage Subsidy Scheme (EWSS).

According to previous guidance material on this matter issued on 1st July 2020 Revenue’s position was that “rent is expenditure on a building or structure and is excluded from being expenditure on research and development by section 766(1)(a) TCA 1997”.

Since then, Revenue’s position has been the source of continuous discussion and debate with many disagreeing with Revenue’s interpretation of the treatment of rent in relation to R&D claims.

Clarity had been sought from Revenue with regards to their position on rent in relation to both historic and new claims for Research and Development tax relief.

In this latest update, Revenue has clarified that rent will qualify in such circumstances where “the expenditure is incurred wholly and exclusively in the carrying on of the R&D activities.”

According to Paragraph 4.2 of the updated Revenue Guidance Manual:

“In many cases expenditure incurred on renting a space or facility, which is used by a company to carry on an R&D activity, may be expenditure that is incurred “for the purposes of”, or “in connection with”, the R&D activity but will not constitute expenditure incurred wholly and exclusively in the carrying on of the R&D activity. The eligibility of rental expenditure incurred by a company will relate to the extent to which it is incurred wholly and exclusively in the carrying on of the R&D activities. Where the nature of the rented space or facility is such that it is integral to the carrying on of the R&D activity itself then it is likely that the rent can be shown to be more than merely “for the purposes of” or “in connection with” the R&D activity.”

Therefore, it is possible for rental expenditure to be included as part of an R&D tax relief claim but only where that rented building is deemed to be integral to the carrying on of R&D activities.  According to Revenue’s guidance material, an example of a rental expense that may be considered qualifying expenditure might relate to the rental of a specialized laboratory used solely for the purposes of carrying out R&D activities. This is contrasted with the rental of office space necessary to house an R&D team, but which is not deemed to be integral to the actual R&D activity.  In this case, this rent would not be treated as eligible expenditure.

Revenue have confirmed that this position will only apply for accounting periods commencing on or after 1st July 2020. 

Revenue’s Manual has also been updated to include:

• Confirmation that the EWSS and TWSS are considered State support and therefore expenditure from such assistance will not qualify for relief.  In other words, such amounts will reduce the qualifying allowable expenditure or qualifying R&D tax relief expenditure.
• The COVID-19 practice for 2020, in relation to the use of a building in a ‘specified relevant period’ under section 766A TCA 1997.
• A further example of a subcontractor who would not be eligible to claim the R&D tax credit.

For further information, please follow the link: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-29/29-02-03.pdf