A company and not a sole trader is entitled to a tax credit equivalent to 25% of qualifying R&D expenditure incurred in a particular accounting period which can be offset against the corporation tax liability.
For accounting periods beginning on or after 1st January 2015, the base year restriction has been removed which means the credit is now available on a volume basis as opposed to an incremental basis.
The 25% Tax Credit is in addition to the normal Case I deductions for expenditure incurred against trading income which may result in a corporation tax refund. For a 12.5% taxpayer, this can result in a net subsidy of 37.5% (i.e. 12.5% corporation tax deduction + 25% R&D tax credit). Please be aware, however, that certain restrictions apply to limit the extent of the refund.
What are “Qualifying R&D Activities”?
Revenue guidelines state that qualifying R&D activities must:
What areas are considered for “qualifying” R&D Activities?
Points in relation to “qualifying” expenditure:
1. Expenditure covered by grant assistance received from the State, the EU, or EEA does not qualify for the credit.
2. Eligible expenditure includes expenses such as salaries, overheads, materials consumed, etc. which are allowable trading deductions for the purposes of computing corporation tax.
3. Expenditure incurred on plant and machinery may also qualify as R&D expenditure. To do so, however, it must be eligible for wear and tear capital allowances and must be used for the purposes of R&D activities.
4. Expenditure incurred on R&D activities outsourced to a third-party or to third level institutions may also qualify as R&D expenditure for the purposes of the R&D Tax credit subject to certain conditions:
5. Companies who build or refurbish buildings or structures for both R&D and other activities may claim an R&D tax credit in respect of the portion of the construction and/or refurbishment costs that relate to R&D activities.
The order of offset of the R&D Tax Credit is as follows:
The amount of cash refund that a company can claim under (Section 7664B) is limited to the greater of:
Points to keep in mind
As Tax Advisers, we’re frequently asked to advise business owners stepping down from running their businesses; individuals passing the farm or business to one or more family members or providing for the next generation with assets other than business assets. To provide the most accurate, relevant and comprehensive advice possible, it is essential that we understand not just the basic conditions of the main Reliefs and Exemptions but that we have an in-depth knowledge of these rules including exceptions, anti-avoidance provisions, etc.
Agricultural Relief is one of the most significant Reliefs from Capital Acquisitions Tax i.e. the tax that affects recipients of gifts and inheritances.
As you’re probably aware, Agricultural Relief takes the form of a 90% reduction in the market value of the agricultural property which means that only 10% of the market value is liable to Capital Acquisitions Tax.
The relevant piece of legislation is Section 89 CATCA 2003 which provides tax Relief as follows:
Who is a “Farmer”?
To qualify for Agricultural Relief, the individual receiving the gift or inheritance must be deemed to be a “Farmer” on the Valuation Date.
For the purposes of Agricultural Relief, a “Farmer” is defined as an individual in respect of whom at least 80% of the market value of his or her assets, after taking the gift or inheritance, consists of agricultural property on the valuation date of the gift or the inheritance. This is calculated as follows:
Agricultural Property x 100% = 80% at least
Agricultural Property + Non-Agricultural Property
Finance Act 2014 Changes
The following conditions were introduced for gifts or inheritances taken on/after 1st January 2015 where the “Valuation Date” is also on/after 1st January 2015:
The beneficiary must:
The individual may lease the agricultural property to a number of lessees as long as each lease and lessee satisfies the conditions of the relief.
If the beneficiary farms the agricultural property but then decides to lease it within the six year period, then NO clawback of Agricultural Relief will arise providing the lessee and the lease meet the relevant conditions for the remainder of the six year period.
If, following the gift or inheritance the beneficiary leases the agricultural property and within the six year period decides to farm it him/herself, NO clawback of Agricultural Relief will arise.
There is one exception to the “Farmer Test” requirement. To qualify for Agricultural Relief, the beneficiary doesn’t need to meet the conditions of the “farmer test” where the agricultural property consists of trees or underwood.
This concession does not apply to the lands on which the trees or underwood grow. To be eligible for Agricultural Relief on the lands, the beneficiary must meet the “farmer” criteria.
What’s included in the Farmer Test?
When carrying out the Farmer Test, the following must be included:
As you have seen, the liabilities of the beneficiary are not taken into account when carrying out the Farmer Test. There is, however, one exception and that is any mortgage on the main or principal private residence of the individual, providing it is not deemed to be agricultural property. Therefore, if the beneficiary’s dwelling house is not a farmhouse then he/she can deduct the amount of the mortgage from its value thereby reducing the value of this non-agricultural asset in the Farmer Test calculation. It is important to remember that the mortgage can only relate to borrowings used for the purchase, repair or improvement of that property.
This is known as the Farmer Test and only by meeting this test will the done or successor be eligible for the 90% Agricultural Relief.
The Farmer Test isn’t quite as straight forward as it seems. If the individual is taking a life interest in agricultural property or some other limited interest, the gross market value of that interest should be included in the Farmer Test i.e. the value before the age/gender factor is applied. This point can often be overlooked when carrying out the all too important calculations.
Another point to be aware of is where a benefit is taken subject to a condition in a Will or Deed of Gift that the benefit must be invested in agricultural property. If that condition is fulfilled within two years from the date of the benefit, then Agricultural Relief will apply providing the beneficiary passes the Farmer’s Test because the benefit is considered to be agricultural property both at the date of the benefit and at the valuation date.
The beneficiary cannot claim Agricultural Relief in respect of this benefit unless it was subject to the condition to invest in agricultural property. It is also important to remember that if the benefit is not invested in agricultural property then it will fail. However, if the client inserts a “gift over” clause in the Will or Deed of Gift then even if the beneficiary doesn’t invest in agricultural property within two years as per the condition, he/she can still receive the benefit.
If the individual is beneficially entitled in possession to (a) an interest in expectancy (e.g. a future interest) and/or (b) property contained in a discretionary trust which was set up by and for the benefit of the done/successor then these amounts should be included in the 80% Farmer Test Calculation.
This is to prevent the donee/successor from using artificial means to reduce his/her non-agricultural property in an attempt to meet the 80% Farmers Test and qualify for the 90% Agricultural Relief.
A future interest is taken into account whether it is vested or contingent i.e. it’s taken into account even where there is only a possibility that the beneficiary may actually receive the benefit.
In the event of a remainder interest, its value is arrived at by deducting the value of the life interest from the market value.
Shares in a company carrying on a farming trade
“Agricultural property” does not include shares in a company carrying on a farming trade.
Agricultural property and other assets used in a farming business carried on by a company may, if conditions are met, qualify for Business Relief.
Where both business relief and agricultural relief can be claimed by a beneficiary, Agricultural Relief must be claimed.
Agricultural Relief and Dwelling House Exemption
In circumstances where the agricultural property includes a farmhouse on which Agricultural Relief is available, you should also check to see if the Dwelling House Relief also applies.
Where both Reliefs apply you should:
A clawback of Agricultural Relief arises if the agricultural property, contained in the gift or inheritance, is disposed of within a six year period commencing on the date of the gift or inheritance and is not replaced by other agricultural property.
For benefits received on or after 1st January 2015, a clawback of agricultural relief will also arise where the farmer or lessee ceases to farm all or part of the agricultural property, except for crops, trees or underwood, for at least 50% of that person’s working week within a six year period beginning on the valuation date of the gift/inheritance.
This clawback applies in all cases except where the farmer dies prior to the cessation of the farming activity.
In circumstances where there a clawback of agricultural relief arises, the CAT on the gift/inheritance is recalculated as if Agricultural Relief never applied in the first place.
There will be a clawback of Agricultural Relief if the agricultural property is sold, otherwise disposed of or compulsorily acquired within six years beginning on the date of the gift/inheritance and the full proceeds are not reinvested in replacement agricultural property within one year of the sale/disposal or six years of the compulsory acquisition.
If the disposal or compulsory acquisition takes place after the beneficiary dies the Agricultural Relief will not be clawed back. Equally the Relief will not be withdrawn on the death of a life tenant within six years of taking the benefit or where the beneficiary receives an interest in agricultural property for a period certain which is less than six years.
If only a portion of the proceeds is re-invested in agricultural property, then only a portion of the relief can be clawed back. For example, if a Farmer disposes of 100% of the land he inherited but only reinvests 75% of the proceeds back into agricultural property then CAT will be calculated as if 25% of the value of that farm had not ever qualified as agricultural property.
If the beneficiary disposes of agricultural property that qualified for Agricultural Relief, he/she cannot use the proceeds from that sale to buy “replacement” agricultural property from his/her spouse/civil partner.
We referred above to a situation where an individual didn’t need to qualify as a Farmer to be eligible for Retirement Relief. Where that beneficiary, in relation to trees or underwood, disposes of these assets within six years of the date of the gift or inheritance there will be no clawback of the relief.
For Development Land, the Clawback period is extended from six to ten years in the following circumstances where:
“Development land” is defined as land in Ireland where the market value at the date of a gift or inheritance exceeds the current use value of that land on that same date. It also includes shares which derive their value, wholly or mainly, from such land.
As you are aware, when calculating agricultural relief, the relief is based on the market value. Where the market value is comprised of both development value and current use value and Section 102A CATCA 2003 applies, then only the relief relating to the development land will be clawed back. This relief will be clawed back even if the sales proceeds were used to purchase replacement agricultural property.
Therefore to fulfill the criteria of being a “Farmer” means: