Finance Act 2004

Chapter 4

Corporation Tax

Tax credit for research and development expenditure, etc.

33.—(1) The Principal Act is amended—

(a) by substituting the following for section 766:

“Tax credit for research and development expenditure.

766.—(1) (a) In this section—

‘appropriate inspector’ has the same meaning as in section 950;

‘EEA Agreement’ means the Agreement on the European Economic Area signed at Oporto on 2 May 1992 as adjusted by the Protocol signed at Brussels on 17 March 1993;

‘expenditure on research and development’, in relation to a company, means expenditure, other than expenditure on a building or structure, incurred by the company in the carrying on by it of research and development activities in a relevant Member State, being expenditure—

(i) which is allowable for the purposes of tax in the State as a deduction in computing the income from a trade (otherwise than by virtue of section 307) or is relieved under Part 8,

(ii) on machinery or plant which qualifies for any allowance under Part 9 or this Chapter, or

(iii) which qualifies for an allowance under section 764,

but—

(I) expenditure on research and development shall not include a royalty or other sum paid by a company in respect of the user of an invention—

(A) if the royalty or other sum is paid to a person who is connected with the company within the meaning of section 10 and is income from a qualifying patent within the meaning of section 234, or

(B) to the extent to which the royalty or other sum exceeds the royalty or other sum which would have been paid if the payer of the royalty or other sum and the beneficial recipient of the royalty or other sum were independent persons acting at arm's length,

and

(II) expenditure incurred by a company which is resident in the State shall not be expenditure on research and development if it—

(A) may be taken into account as an expense in computing income of the company,

(B) is expenditure in respect of which an allowance for capital expenditure may be made to the company, or

(C) may otherwise be allowed or relieved in relation to the company,

for the purposes of tax in a territory other than the State;

‘group expenditure on research and development’, in relation to a relevant period of a group of companies, means the aggregate of the amounts of expenditure on research and development incurred in the relevant period by qualified companies which for the relevant period are members of the group: but—

(i) expenditure incurred by a company which is a member of a group for a part of a relevant period shall only be included in group expenditure on research and development if the expenditure is incurred at a time when the company is a member of the group, and

(ii) expenditure on research and development incurred by a company which has been included in group expenditure on research and development in relation to a group shall not be included in group expenditure on research and development in relation to any other group;

‘qualified company’, in relation to a relevant period, means a company which—

(i) throughout the relevant period—

(I) carries on a trade,

(II) is a 51 per cent subsidiary of a company which carries on a trade, or

(III) is a 51 per cent subsidiary of a company whose business consists wholly or mainly of the holding of stocks, shares or securities of a company which carries on a trade or more than one such company,

(ii) carries out research and development activities in the relevant period, and

(iii) maintains a record of expenditure incurred by it in the carrying out by it of those activities;

‘qualifying group expenditure on research and development’, in relation to a relevant period, means an amount equal to the excess of the amount of group expenditure on research and development in relation to the relevant period over the threshold amount in relation to the relevant period;

‘relevant Member State’ means a state which is a Member State of the European Communities or, not being such a Member State, a state which is a contracting party to the EEA Agreement;

‘relevant period’ means—

(i) in the case of companies which are members of a group the respective ends of the accounting periods of the members of which coincide, the period of 12 months throughout which one or more members of the group carries on a trade and ending at the end of the first accounting period which commences on or after 1 January 2004, and

(ii) in the case of companies which are members of a group the respective ends of the accounting periods of which do not coincide, the period specified in a notice in writing made jointly by companies which are members of the group and given to the appropriate inspector within a period of 9 months after the end of the period so specified, being a period of 12 months throughout which one or more members of the group carries on a trade and ending at the end of the first accounting period of a company which is a member of the group which accounting period commences on or after 1 January 2004,

and each subsequent period of 12 months commencing immediately after the end of the preceding relevant period;

‘research and development activities’ means systematic, investigative or experimental activities in a field of science or technology, being one or more of the following—

(i) basic research, namely, experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge without a specific practical application in view,

(ii) applied research, namely, work undertaken in order to gain scientific or technical knowledge and directed towards a specific practical application, or

(iii) experimental development, namely, work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto: but activities will not be research and development activities unless they—

(I) seek to achieve scientific or technological advancement, and

(II) involve the resolution of scientific or technological uncertainty;

‘threshold amount’, in relation to a relevant period of a group of companies, means—

(i) where the relevant period is a period commencing at any time after 31 December 2003 and before 1 January 2007, the aggregate of the amounts of expenditure on research and development incurred in the period of one year ending on a date in the year 2003 which corresponds with the date on which the relevant period ends,

(ii) in any other case, the aggregate of the amounts of expenditure on research and development incurred in the period of one year ending on a date which is 3 years before the end of the relevant period,

by all companies which are members of the group in the threshold period in relation to the relevant period concerned: but expenditure incurred by a company which is a member of the group for a part of the threshold period shall only be included in the threshold amount if the expenditure is incurred at a time when the company is a member of the group;

‘threshold period’, in relation to a relevant period, means the period of one year referred to in the definition of ‘threshold amount’;

‘university or institute of higher education’ means—

(i) a college or institution of higher education in the State which—

(I) provides courses to which a scheme approved by the Minister for Education and Science under the Local Authorities (Higher Education Grants) Acts 1968 to 1992 applies, or

(II) operates in accordance with a code of standards which from time to time may, with the consent of the Minister for Finance, be laid down by the Minister for Education and Science, and which the Minister for Education and Science approves for the purposes of section 473A;

(ii) any university or similar institution of higher education in a relevant Member State (other than the State) which—

(I) is maintained or assisted by recurrent grants from public funds of that or any other relevant Member State (including the State), or

(II) is a duly accredited university or institution of higher education in the Member State in which it is situated.

(b) For the purposes of this section—

(i) 2 companies shall be deemed to be members of a group if one company is a 51 per cent subsidiary of the other company or both companies are 51 per cent subsidiaries of a third company: but in determining whether one company is a 51 per cent subsidiary of another company, the other company shall be treated as not being the owner of—

(I) any share capital which it owns directly in a company if a profit on a sale of the shares would be treated as a trading receipt of its trade, or

(II) any share capital which it owns indirectly, and which is owned directly by a company for which a profit on a sale of the shares would be a trading receipt;

(ii) sections 412 to 418 shall apply for the purposes of this paragraph as they would apply for the purposes of Chapter 5 of Part 12 if—

(I) ‘51 per cent subsidiary’ were substituted for ‘75 per cent subsidiary’ in each place where it occurs in that Chapter, and

(II) paragraph (c) of section 411(1) were deleted;

(iii) a company and all its 51 per cent subsidiaries shall form a group and, where that company is a member of a group as being itself a 51 per cent subsidiary, that group shall comprise all its 51 per cent subsidiaries and the first-mentioned group shall be deemed not to be a group: but a company which is not a member of a group shall be treated as if it were a member of a group which consists of that company;

(iv) in determining whether a company was a member of a group of companies (in this subparagraph referred to as the ‘threshold group’) for the purposes of determining the threshold amount in relation to a relevant period of a group of companies (in this subparagraph referred to as the ‘relevant group’), the threshold group shall be treated as the same group as the relevant group notwithstanding that one or more of the companies in the threshold group is not in the relevant group, or vice versa, where any person or group of persons which controlled the threshold group is the same as, or has a reasonable commonality of identity with, the person or group of persons which controls the relevant group;

(v) expenditure shall not be regarded as having been incurred by a company if it has been or is to be met directly or indirectly by grant assistance or any other assistance which is granted by or through the State, any board established by statute, any public or local authority or any other agency of the State;

(vi) where a company—

(I) incurs expenditure on research and development at a time when the company is not carrying on a trade, being expenditure which, apart from this subparagraph, is not included in group expenditure on research and development, and

(II) the company begins to carry on a trade after that time,

the expenditure shall be treated as it would if the company had commenced to carry on the trade at the time the expenditure was incurred;

(vii) where in any period a company—

(I) incurs expenditure on research and development, and

(II) pays a sum to a university or institute of higher education in order for that university or institute to carry on research and development activities in a relevant Member State,

so much of the sum so paid as does not exceed 5 per cent of that expenditure shall be treated as if it were expenditure incurred by the company on the carrying on by it of research and development activities.

(2) Where for any accounting period a company makes a claim in that behalf to the appropriate inspector, the corporation tax of the company for that accounting period shall be reduced by an amount equal to 20 per cent of qualifying expenditure attributable to the company as is referable to the accounting period.

(3) For the purposes of subsection (2)—

(a) qualifying expenditure attributable to a company in relation to a relevant period shall be so much of the amount of qualifying group expenditure on research and development in the relevant period as is attributed to the company in the manner specified in a notice made jointly in writing to the appropriate inspector by the qualified companies that are members of the group: but where no such notice is given means an amount determined by the formula—

Q ×

C

_

G

 

where—

Q is the qualifying group expenditure on research and development in the relevant period,

C is the amount of expenditure on research and development incurred by the company in the relevant period at a time when the company is a member of the group, and

G is the group expenditure on research and development in the relevant period,

(b) where a relevant period coincides with an accounting period of a company, the amount of qualifying expenditure on research and development attributable to the company as is referable to the accounting period of the company shall be the full amount of that expenditure, and

(c) where the relevant period does not coincide with an accounting period of the company—

(i) the qualifying expenditure on research and development attributable to the company shall be apportioned to the accounting periods which fall wholly or partly in the relevant period, and

(ii) the amount so apportioned to an accounting period shall be treated as the amount of qualifying expenditure on research and development attributable to the company as is referable to the accounting period of the company.

(4) Where as respects any accounting period of a company the amount by which the company is entitled to reduce corporation tax of the accounting period exceeds the corporation tax of the company for the accounting period, the excess shall be carried forward and treated as an amount by which corporation tax for the next succeeding accounting period may be reduced, and so on for succeeding accounting periods.

(5) Where a company claims relief under this section in respect of any accounting period, it shall specify the amount of relief claimed in its return under section 951 for that accounting period.

(6)  (a) The Minister for Enterprise, Trade and Employment, in consultation with the Minister for Finance, may make regulations for the purposes of this section providing—

(i) that such categories of activities as may be specified in the regulations are not research and development activities, and

(ii) that such other categories of activities as may be specified in the regulations are research and development activities.

(b) Where regulations are to be made under this subsection, a draft of the regulations shall be laid before Dáil Éireann and the regulations shall not be made until a resolution approving the draft has been passed by Dáil Éireann.

Tax credit on expenditure on buildings or structures used for research and development.

766A.—(1) (a) In this section—

‘qualified company’, ‘relevant member State’ and ‘research and development activities’ have the same meanings as in section 766;

‘refurbishment’, in relation to a building or structure, means any work of construction, reconstruction, repair or renewal including the provision of water, sewerage or heating facilities carried out in the course of the repair or restoration, or maintenance in the nature of repair or restoration, of the building or structure;

‘relevant expenditure’ on a building or structure, in relation to a company, means expenditure incurred by the company on the construction of a building or structure which is to be used wholly and exclusively for the purposes of the carrying on by the company of research and development activities in a relevant Member State, being expenditure which qualifies for an allowance under Part 9 or this Part: but expenditure incurred by a company which is resident in the State shall not be relevant expenditure if it—

(i) may be taken into account as an expense in computing income of the company,

(ii) is expenditure in respect of which an allowance for capital expenditure may be made to the company, or

(iii) may otherwise be allowed or relieved in relation to the company,

for the purposes of tax in a territory other than the State.

(b) For the purposes of this section—

(i) expenditure shall not be regarded as having been incurred by a company if it has been or is to be met directly or indirectly by the State;

(ii) a reference to expenditure incurred on the construction of a building or structure includes expenditure on the refurbishment of the building or structure, but does not include—

(I) any expenditure incurred on the acquisition of, or of rights in or over, any land,

(II) any expenditure on the provision of machinery or plant or on any asset treated for any chargeable period as machinery or plant, or

(III) any expenditure on research and development within the meaning of section 766;

(iii) where a building or structure which is to be used for the purposes of the carrying on of research and development activities forms part of a building or is one of a number of buildings in a single development, or forms a part of a building which is itself one of a number of buildings in a single development, there shall be made such apportionment as is necessary of the expenditure incurred on the construction of the whole building or number of buildings, as the case may be, for the purpose of determining the expenditure incurred on the construction of the building or structure which is to be used for the purposes of carrying on of research and development activities,

(iv) paragraphs (i) to (iii) of section 766(1)(b) shall apply.

(2) Where in an accounting period a qualified company incurs relevant expenditure on a building or structure, the corporation tax of the company for each accounting period falling wholly or partly into the period of 4 years commencing at the beginning of that accounting period shall be reduced by an amount determined by the formula—

E ×

M

____

1460

 

where—

E is an amount equal to 20 per cent of the amount of the relevant expenditure on the building or structure, and

M is the number of days in the accounting period which fall into that period of 4 years.

(3) Where—

(i) in an accounting period a company incurs relevant expenditure on a building or structure,

(ii) in relation to that expenditure the corporation tax of the company is reduced under subsection (2), and

(iii) at any time in the period of 10 years commencing at the beginning of that accounting period the building or structure is sold or commences to be used for purposes other than the carrying on by the company of research and development activities,

then the company—

(I) shall not be entitled to reduce corporation tax under subsection (2) for any accounting period ending after the time specified in paragraph (iii), and

(II) shall be charged to tax under Case IV of Schedule D for the accounting period in which the building or structure is sold, or as the case may be commences to be used for purposes other than the carrying on by the company of research and development activities, in an amount equal to 4 times the aggregate amount by which corporation tax of the company or another company was reduced under subsection (2) or (4) in relation to that expenditure.

(4)  (a) Subject to paragraphs (b) and (c) where as respects any accounting period of a company the amount by which the company is entitled under this section to reduce corporation tax of the accounting period exceeds the relevant corporation tax of the company for the accounting period, the excess shall be carried forward and treated as an amount by which corporation tax for the next succeeding accounting period may be reduced, and so on for succeeding accounting periods.

(b) Where the company referred to in paragraph (a) is a member of a group of companies, the company may specify that the excess specified in paragraph (a), or any part of that excess, is to be treated as an amount by which corporation tax payable by another company which is a member of that group for that other company's corresponding accounting period is to be reduced.

(c) So much of the excess specified under paragraph (a) as is treated under paragraph (b) as an amount by which tax payable by another company is to be reduced shall not be carried forward under paragraph (a).

(5) Where a company claims relief under this section in respect of any accounting period, it shall specify the amount of relief claimed in its return under section 951 for that accounting period.”,

and

(b) in section 141(5)(a), by substituting the following for the definition of “research and development activities”:

“‘research and development activities’ has the meaning that it would have in section 766 if section 33 of the Finance Act 2004 had not been enacted.”.

(2) This section comes into operation on such day as the Minister for Finance may appoint by order and has effect as respects expenditure incurred on or after that day.