A good place to innovate but could do better

Companies in Ireland have become more innovative over the past 12 months, with almost nine in 10 businesses now considering themselves to be innovators. This is among the key findings of KPMG’s latest Innovation Monitor. The report, which is based on research carried out on behalf of KPMG by Red C, shows an increase in innovation activity with 88 per cent of companies saying they are engaged in it either in Ireland or overseas, an increase of eight percentage points on 2016.

The research also found that 62 per cent of businesses rated Ireland's innovation culture as either friendly or very friendly. This is a fall of eight percentage points on last year. "This weaker sentiment may reflect the increased challenges businesses are facing as a consequence of Brexit and other external factors," says report author, KPMG tax director Damien Flanagan.

“What’s apparent is that companies believe Ireland is a good place to innovate,” he adds. “As with all things there are areas where improvements can be made and where we could do better.”

The availability of qualified in-house personnel (68 per cent) and R&D funding (63 per cent) were the factors most frequently cited by businesses when asked what influences their ability to innovate.

“We hear about issues in accessing the right talent from clients all the time,” says Flanagan. “It is an issue for organisations of all sizes, but even more so for SMEs, which have to compete against large firms and multinationals for talent and that can be particularly difficult. There are also issues around training and the need to get new staff up to speed when they are recruited.”

Several respondents called for greater emphasis on innovation at second and third-level. “The universities could perhaps place a greater emphasis on innovation and entrepreneurship in courses,” Flanagan adds.

Funding includes the R&D tax credit, the knowledge development box (KDB), and grants from IDA, Enterprise Ireland and other organisations such as Science Foundation Ireland. Interestingly, the research found that most companies have never claimed an R&D tax credit and many could potentially lose out on financial benefits through lack of awareness of the KDB. Better communication, of both incentive availability and eligibility criteria, was one of the key improvements companies would like to see made to both the R&D tax credit and KDB regimes.

“SMEs in particular would benefit from becoming more aware of the incentives. For example, the KDB is a great fit for companies undertaking the majority of their R&D activity in Ireland, where that activity leads to certain intellectual property,” Flanagan points out. “Multinational companies are very aware of them and this is important. It allows them to demonstrate to their corporate headquarters that Ireland has an attractive R&D regime that’s well established as well as a supportive culture for innovation. They can use this to get mandates for further investment and development work here.”

Certainty is another important issue. According to Flanagan, firms crave certainty that there will be no adverse changes to tax and other incentive schemes if they are to continue investing.

A recent Government report concluded that the R&D tax credit is “reasonably successful in its aim of increasing business R&D”. However, it also concluded that 60 per cent of research and development work was directly attributable to the R&D tax credit, while 40 per cent would have taken place whether the credit was in place or not and made some proposals to reduce this so-called “dead weight”.

The Red C research found that limiting the amount of cash refunds a company can claim, or reducing the rate of the incentive for non-taxpaying firms that avail of the refundable mechanism over a number of years, would negatively impact the attractiveness of the R&D tax credit for seven in 10 companies.

Furthermore, almost three quarters (73 per cent) of companies say that the attractiveness of the R&D tax credit as an incentive for R&D would be negatively impacted if the Government was to reintroduce some form of mechanism that meant the credit was only available on incremental R&D spend in excess of the prior year R&D spend.

"On 12th September, the Government published a report entitled Review of Ireland's Corporation Tax Code, otherwise known as the Coffey Report," Flanagan notes. "Helpfully, this report recommended that no changes be made to Ireland's R&D tax credit regime or the KDB.

“Businesses have to innovate to maintain competitive advantage as they prepare for Brexit and it appears that access to funding and skills are the main barriers to increasing levels of R&D and innovation,” he adds. “These issues have to be addressed as incentivising and rewarding innovators has never been more important. On the other hand, our research has found that Ireland remains a competitive and attractive country for innovation. A lot of companies are considering Ireland as a base for innovation so continued certainty around the R&D tax credit, which is one of the pillars of our tax policy along with the 12.5 per cent rate and the knowledge development box, is important.”