Ben is a key employee of Develop Co., which has an accounting year end of 31 December 2024. Develop Co. decided to surrender €10,000 of its R&D credit for 2024 to Ben.
Ben seeks to claim this as a credit against the tax on his Income Tax from Develop Co. in 2025.
His total income is €120,000 and standard rate cut-off point for 2025 is €44,000.
Details of Ben's tax
| Details | Values |
|---|
|
Taxed €44,000 at 20%
|
€8,800
|
|
Taxed €76,000 (the balance) at 40%
|
€30,400
|
|
Total tax liability
|
€39,200
|
|
Less tax credits
|
€4,000
|
|
Income Tax payable
|
€35,200
|
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 29.33% (€35,200/€120,000).
Details of Ben's claim for full R&D credit
| Details | Values |
|---|
|
Income Tax payable
|
€35,200
|
|
Less R&D credit
|
€10,000
|
|
Tax due after the credit
|
€25,200
|
The effective rate after the full credit is 21% (€25,200/€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
|
€35,200
|
|
Less restricted R&D credit
|
€7,600
|
|
Tax due after the credit
|
€27,600
|
Restricted R&D credit calculated as follows:
€120,000 x 23% = €27,600
€27,600 less €25,200 = €2,400
€10,000 less €2,400 = €7,600
Effective rate after the use of restricted R&D credit is 23% (€27,600/€120,000).