Ben is a key employee of Develop Co., which has an accounting year end of 31 December 2023. Develop Co. decided to surrender €10,000 of its R&D credit for 2023 to Ben.
Ben seeks to claim this as a credit against the tax on his Income Tax from Develop Co. in 2024.
His total income is €120,000 and standard rate cut-off point for 2024 is €42,000.
Details of Ben's tax
| Details | Values |
|---|
|
Taxed €42,000 at 20%
|
€8,400
|
|
Taxed €78,000 (the balance) at 40%
|
€31,200
|
|
Total tax liability
|
€39,600
|
|
Less tax credits
|
€3,750
|
|
Income Tax payable
|
€35,850
|
Ben's effective rate of Income Tax must be determined to ensure that the minimum threshold of 23% is not breached.
The rate before the credit is 29.88% (€35,850/€120,000).
Details of Ben's claim for full R&D credit
| Details | Values |
|---|
|
Income Tax payable
|
€35,850
|
|
Less R&D credit
|
€10,000
|
|
Tax due after the credit
|
€25,850
|
The effective rate after the full credit is 21.54% (€25,850/€120,000). Therefore, Ben cannot use the full credit against the Income Tax on his salary in 2024.
He can only use so much of the R&D credit as to give a minimum effective rate of 23%.
Details of Ben's claim for restricted R&D credit
| Details | Values |
|---|
|
Income Tax payable
|
€35,850
|
|
Less restricted R&D credit
|
€8,250
|
|
Tax due after the credit
|
€27,600
|
Restricted R&D credit calculated as follows:
€120,000 x 23% = €27,600
€27,600 less €25,850 = €1,750
€10,000 less €1,750 = €8,250
Effective rate after the use of restricted R&D credit is 23% (€27,600/€120,000).