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Summary of Taxation Legislation
Research
Expenditure on Construction Related Projects in Ireland
Summary
The
accounting treatment for expenditure on Research and Development
is outlined in Statement of Standard Accounting Practice
No. 13. This statement broadly indicates expenditure should
be written off in the year incurred. Provision is made
for the capitalization of costs in certain circumstances,
with subsequent writing off over a number of years, matching
costs with the income generated.
For
taxation purposes, such expenditure is usually written
off in the year which it is incurred. This is particularly
so regarding Revenue expenditure. The writing off of capital
expenditure is somewhat more restricted and depends on
the use to which the capital item is put.
Scientific Research
A
person carrying on a trade who incurs capital expenditure
on 'scientific research' is entitled to capital allowances
for a tax year of 100% of the expenditure incurred in
that tax year. This basically means all expenditure, whether
Revenue or Capital, on 'scientific research' is allowable
in full in the year incurred. Scientific Research is defined
as meaning 'any activities in the field of natural or
applied science for the extension of knowledge' . The
deduction for such research is allowable, whether or not
the scientific research is related to the taxpayer's trade.
Payments for 'Know How'
A
trader may incur expenditure in acquiring for use in his/her
business technical or other information coming under the
general description of 'Know How' . In the ordinary way,
if the expenditure is not of a capital nature, it is fully
deductible but capital expenditure would not be allowed.
There is a relieving provision (TCA 1997, Section 768)
which provides that a trader may deduct as a trading expense
any expenditure, including capital expenditure, in acquiring
'know how' for use in his/her trade. This includes expenditure
incurred before the commencement of trading.
| 'Know
How' is defined for the purpose of this section as
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Industrial information and techniques likely to assist
in the manufacture or processing of goods or materials,
or in the carrying out of any agricultural, forestry,
fishing, mining or other extractive operations. '
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Pre-Trading Expenses
Expenses
incurred prior to commencement of trading are not allowable
for tax purposes under general principles as an expense
in calculating the taxable profits of a trade. However,
by virtue of TCA 1997 Section 82, most pre-trading expenses
incurred within three years of commencement may now be
allowed against subsequent profits of the trade or profession.
Manufacturing Relief
A
10% rate of Corporation Tax applies to certain activities
carried out within the State. These activities include
the following which may be relevant regarding research
and development :-
(a)
The rendering of design and planning services (where the
work is carried out in the State) in connection with chemical,
civil, electrical or mechanical engineering works executed
outside the European Union ;
(b)
The rendering of computer services (data processing and
software development services) carried out in the State
by an undertaking which has received specific Government
grant assistance. This grant assistance may be an IDA
or Enterprise Ireland employment grant, or grant for technical/consultancy
services from the Shannon Free Airport Development Company
or from Udaras Na Gaeltachta.
If
a company is entitled to claim manufacturing relief for
computer software development, as outlined above, the
company may also be deemed to be a qualifying entity for
the purpose of raising funds under a Business Expansion
Scheme. This basically entitles, within certain limits,
shareholders to obtain tax relief for their investments
on ordinary share capital.
Patent Royalties
It
may be possible to establish a structure whereby tax free
income could be paid to the holder of a qualifying Patent
which involved radical innovation and which was patented
for bona-fide commercial reasons.
Personal - v - Corporate Structure
The
rate of Corporate Tax is scheduled to reduce to 12.5%
by 2003. By comparison, the top rate of personal tax is
currently 42% . As such, while a corporate structure may
be beneficial for BES/Manufacturing relief purposes, it
may be more tax efficient if expenditure can be allowed
against top rate personal income.
CONCLUSION
The
foregoing represents a very broad outline of the tax provisions
relating to research and development. If any further information
is required, please do not hesitate to contact me.
____________________
Terry Quigley
Tax Partner
Gorman Quigley Penrose
Chartered Accountants
11th May 2000
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