Pre-Trading R&D Tax Credit

1. Previously Revenue only allowed companies to carry forward R&D tax credits for offset against future corporation tax liabilities. The removal of limits on the payable element of the credit eliminates the administrative burden of reviewing payroll liabilities, to then quantifying the payable element of the current refund and the subsequent tracking of the carried forward credits. Medium to large companies that have significant capital investment in R&D, which would exceed their payroll costs, are most likely to benefit. Overall, a pre-trading company can now fall into the refundable tax credit as cash, rather than carrying the R&D tax credit forward as a non-refundable credit.
2. For the purposes of an R&D tax credit claim under section 766, where expenditure has been incurred by a company in the carrying on of R&D activities before the company commenced to trade, a claim in respect of pre-trading expenditure must be made within 12 months from the end of the accounting period, beginning at the date the company first carries on a trade
3. The Finance Act 2022 also introduced additional reporting requirements with respect to the breakdown of R&D expenditure which must now be filed in the return when the claim is made.
4. The amount of the R&D tax credit due is the amount which the company would have been entitled to claim if it had been trading when the expenditure was incurred. This means that the one-year pre trading limit has been lifted to include all years where a valid claim would be due had they been trading.

Example:

C Limited, before commencing to trade, carried on pre-trading R&D activities in respect of the accounting periods ended 31 December 2020, 31 December 2021 and 31 December 2022. The company commenced to trade on 1 January 2023. The R&D expenditure incurred by the company is as follows:

Accounting period ended 31 December 2020 €50,000
Accounting period ended 31 December 2021 €25,000
Accounting period ended 31 December 2022 €75,000

Total pre-trading R&D expenditure €150,000

Accounting period ended 31 December 2023 €90,000

As the company first begins to trade in the accounting period ended 31 December 2023, the R&D corporation tax credit claim shall be made under section 766C.
The total R&D corporation tax credit claimed by the company is €60,000 (i.e. €150,000 + €90,000 = €240,000 x 25%).
The first instalment will equal the greater of €25,000 (or the credit claimed if lower), or 50% of the amount of the credit claimed. Therefore, the first instalment due is €30,000. C Limited must specify, in respect of the first instalment, whether the amount of the first instalment, or any portion of the amount, is to be –

(a) Treated as an overpayment of tax (for the purposes of section 960H)
(b) Paid to the company by Revenue.

How Braithwaite Can help……

During the Pre-Trading phase, it is especially important to correctly capture true R&D expenditure in real-time. This will allow for accuracy and peace of mind until the claim is due to be filed. We have devised a service to support companies in that vital start-up stage where we will assist by creating a shadow R&D claim as if you were trading.

– We collate, devise, and file the claim internally. This will negate retrospective requirements when you come to trade as all will be ready to file for Revenue.

– We support your team to help them capture data in real-time resulting in a more significant cash/tax benefit.

– We document and accurately account for project eligibility as they happen ensuring compliance with Revenue and a more accurate benefit.

– We track any grant aid received/receivable which is disallowed when calculating an R&D tax credit.

Remember: In 2025 the 25% rate increases to 30%!