The Government’s research and development (R&D) tax credit was increased to 35 per cent in the latest budget but what impact will this have on innovation? The bureaucracy surrounding it remains a challenge, although the increase has been broadly welcomed.
“A 35 per cent rate is a significant improvement,” says Thomas Fleming, tax director at PwC Ireland, “and follows closely on the prior increase from 25 per cent to 30 per cent in Finance Act 2023.”
“Over two years, the cumulative uplift is material and signals a strong policy commitment to R&D investment.”
That cumulative jump from 25 to 35 per cent in only a few years has at least ostensibly made the Republic more attractive for R&D investment.
READ MORE
“In headline terms, Ireland now sits toward the top of European and global R&D credit rates, which helps ensure Ireland is considered strongly in multinational location decisions and is attractive to scaling SMEs,” says Fleming.
“That said, structural factors are clearly also having an impact on these investment decisions. For example, housing is impacting the availability of talent, while the cost of energy also remains central to investment decisions.”
There’s always a but, especially when something is broadly positive, and the mechanics are where most of the complaints lie.
“The R&D tax credit is generally policed by Revenue in a reasonable manner. It is a large cost to the exchequer, albeit it more than pays for itself, so you would expect it to be monitored closely,” says Peter Vale, tax partner at Grant Thornton.
“The mechanics of claiming the credit in the tax return, however, are overly complex and could be simplified. There is also a tight 12-month window in which to claim the credit. While this is essentially to allow the department to get a handle on refunds in a timely manner, it could be extended to 24 months, or some more latitude given where claims are denied due to simple errors being made on the complicated tax return.”
Mechanical challenges aside, the move to 35 per cent has at least put the Republic in a strong position compared to its European peers.
“Ireland’s enhanced rate compares well with leading European regimes and is notably above the UK’s 20 per cent. This positions Ireland competitively in headline terms. Areas where other jurisdictions offer more flexibility include subcontracting rules and targeted incentives for key strategic areas,” says Fleming.
“Currently, activities such as innovation, digitalisation and decarbonisation may fall outside strict R&D tax-credit definitions. Addressing these features through the R&D Compass would further strengthen the regime.”
Despite these issues, Vale is still happy on the whole with where the Republic stands at a European level.
“Where the mechanics can differ, Ireland’s regime would rank at or close to the top. A key feature of Ireland’s regime is that it applies to small and large groups, with the tax credit available to all regardless of profitability. Many countries offer a lower effective credit for loss making companies,” he says.
How R&D credits are applied is going to be examined under the Government’s aforementioned R&D Compass, which Fleming says provides a substantial opportunity to address some of the current issues.
“The R&D Compass is an opportunity to set a clear strategy for Ireland’s incentives. We would like to see a separate innovation tax credit aimed at activities that enable and support the strong R&D base in Ireland,” he says.
“This innovation tax credit could support activities such as AI agent development, streamlining operations, low-code development, digital twins for manufacturing lines and smart‑factory IoT [internet of things] implementation.”
How R&D is executed is also an area that merits attention under the R&D Compass. Shane Hogan, partner and head of tax at Matheson, says the blurred borders of the actual research shouldn’t hinder companies.
“R&D is increasingly becoming a collaborative process, with different aspects of the research being undertaken in different countries and in some cases outsourced to specialist third parties, including universities,” he says.
“The level of cost of outsourced R&D that can qualify for the Irish R&D tax credit is quite limited. Extending the relief to better capture those costs would greatly improve the Irish regime and could have a meaningful impact on the funding made available to Irish universities involved in collaborative research.”
