Charlie McCreevy (Kildare North, Fianna Fail)

Section 33 gives effect to the budget announcement to introduce a tax credit for research and development by providing for a credit of 20% of incremental expenditure by a group of companies on research and development. Expenditure on buildings is not considered in the calculation of incremental expenditure, as a credit for such expenditure is dealt with separately. Expenditure that is not on buildings, but is incurred in a relevant period by the members of a group of companies, is aggregated. The group's expenditure on research and development in that period is compared with its expenditure in the same area in a base period. A tax credit equal to 20% of the increase in expenditure is given to the group and can be allocated to companies that are members of the group in any manner they wish. The amount allocated to a company can be offset against corporation tax payable by the company in accounting periods falling into the relevant period. Any part of the credit that cannot be set off in that manner in an accounting period is carried forward to be offset against corporation tax payable in the subsequent period. Unused amounts of credit can be carried forward indefinitely.

Last year, 2003, is taken as the base period for 2004, 2005 and 2006. The level of research and development expenditure in 2004 will be compared to the level of such expenditure in 2003. The additional expenditure will qualify for the credit. Similarly, research and development expenditure in 2005 will be compared with such expenditure in 2003. The same approach will be applied in 2006. The approach will give a good incentive to companies to get started on research and development. For later years, the base period will be the corresponding period ending three years earlier.

On Report Stage in the Dáil, I removed the rule that stated that one had to spend a minimum of €50,000 on research and development in order to qualify for the tax credit. Therefore, the credit will apply equally to large and small companies. To qualify for a credit, the research and development work must be carried out by the company in an EEA country. The expenditure must qualify for a tax deduction under Irish law and, in the case of companies that are Irish resident, must not qualify for a deduction under the law of another territory. The credit applies to in-house company expenditure. Payments by a company to a university or third level institute in the EEA to carry out research and development will qualify for the credit, subject to a maximum of 5% of the research and development work being carried out by the company.

The section contains a basic definition of "research and development". The definition covers the full range of research and development activities, from basic research and applied research to experimental development. It requires a systematic, investigative or experimental approach to be taken in a field of science or technology. The section also provides that the Minister for Enterprise, Trade and Employment, in consultation with the Minister for Finance, may make regulations providing that certain categories of activities are, and certain categories are not, research and development activities.

A credit of 20% of the expenditure is allowed in the case of expenditure on a building or structure. The credit is set against corporation tax payable over a period of four years — the year in which the expenditure is incurred and the following three years. If the building concerned is sold or starts to be used for purposes other than the conduct of research and development activities, no further credits are allowed in respect of it and any credit already given is withdrawn. A claimant must be a qualified company.