THE REVENUE COMMISSIONERS warned the government to act quickly to close a loophole that was allowing businesses double claim tax relief on buildings.

A series of changes to tax credits and allowances for scientific research and development were introduced in last year’s budget amid concerns that accountancy firms were starting to help clients use the system in ways that were never intended.

A briefing document prepared for Finance Minister Paschal Donohoe explained how weaknesses in the legislation was allowing some companies to claim a 200% deduction for the cost of a building.

This involved using two separate tax reliefs, one for accelerated capital allowances and a second industrial buildings allowance.

The briefing said: “This would effectively allow a 200% deduction for the cost of the building, 104% in year one and 4% in each of the following nineteen years.”

So-called “gateway claims” were also arising where companies were claiming research and development tax credits as well as capital allowances.

The intention of the ‘R&D tax credit’ was for use in buildings like laboratories, pilot manufacturing facilities, and other such uses.

However, this was being utilised by some companies involved in developing high-spec office buildings where only desk-based research was taking place.

The submission said: “Costs incurred on such a building could qualify for the 25% R&D tax credit and 100% up-front capital allowances. Whereas costs incurred on an identical office building by a business not engaged in R&D would not qualify for any capital allowances at all.”

According to the submission, “more agents appear to be identifying this weakness” with a warning that the loss to the Exchequer could be significant.

Potential for abuses

The Revenue had said there were now “concerns as to the proper functioning of the relief”.

The briefing explained how the legislation was supposed to cover expenditure on a building used for the “purpose” of scientific research.

“This ‘purpose test’ criteria can result in office buildings and other non-industrial buildings qualifying for the relief,” explained the submission.

“This can also include instances where only one part of the building is used by staff undertaking scientific research, with [the] rest of the building occupied by … sales, accounts or HR, but where those functions are asserted to support the research and development function.”

By doing this, a company could then claim for the full building and it would qualify for the generous tax relief available.

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Minister Paschal Donohoe agreed to proposals put forward by the Department of Finance to close off the loopholes amid concerns costs could “escalate significantly”.

The Revenue Commissioners said the changes needed to take place as a matter of urgency to ensure further claims could not begin.

The submission said: “Legal advice from the Attorney General has been sought and it is proposed that these amendments take effect at the earliest date legally permissible.”

In a statement, a Revenue spokesman said the “potential for … abuses” of the tax system was constantly kept under review by them and brought to the attention of the Department of Finance.

He said they would not comment on the potential loss to the Exchequer from abuse of the scheme.

“Revenue is obliged by the provisions of the legislation to ensure that taxpayer information about individual taxpayers or a small group of taxpayers cannot be deduced from any information or data released,” he said.

As such, Revenue is precluded from providing any further information in relation to [the] query.

A Department of Finance spokesman said they believed the issue had been largely nipped in the bud and that the anomaly was not yet “widely known or used”.

“Revenue have estimated that a yield of €3-€4 million should arise from implementing these measures, which is based on the tax returns filed in recent years,” he said.