Creating a supportive environment for research
Companies engaged in R&D projects in Ireland can avail of a wide range of supports
Stimulating R&D and innovation in the economy involves a multi-faceted approach including the continued supply of top-quality and relevant talent, a competitive economy to attract capital investment, and an effective tax system.
A key ambition of the Government’s Innovation 2020 strategy is to increase total investment in R&D in Ireland to 2.5 per cent of GNP. This would represent a near doubling to more than €5 billion annually of the 2015 level of investment. While the increase is to be led by the private sector, the Government has put in place a wide range of supports and incentives to stimulate investment.
The main source of direct support for R&D is Enterprise Ireland, which offers a variety of different programmes to assist companies in their innovation efforts. “What we are trying to do in the R&D funding area is encourage companies that may be doing a little R&D to do a bit more,” says Enterprise Ireland in-company R&D manager Joe Madden.
Several direct supports are available. “There is a feasibility study grant of up to €35,000 or 50 per cent of the cost of investigating the possibility of developing new products, processes, services or improving them,” he says. “We also offer two main forms of direct R&D support – the Agile Innovation Fund and the In-house Research, Development and Innovation (RD&I) Fund.”
The Agile Innovation Fund was introduced last year in response to the accelerating pace of change on international markets. The fund offers firms financial support of up to €150,000, or 50 per cent, of the cost of innovation projects with a value of up to €300,000.
Simplified application process
It is designed to support projects which take place over a relatively short timescale. The agility in its title refers to inbuilt flexibility which caters for the fact that innovation projects are subject to change in line with evolving market and customer needs. The streamlined and simplified application process allows companies to submit a short outline of their proposed project to ascertain its eligibility before going to the time and trouble of preparing and submitting a full funding application.
“We had seen a reduction in the number of applications received for R&D funding in recent years,” Madden explains. “A lot of companies engaged in R&D now are in software and other service areas and their projects might only last six months or even shorter. They were saying it wasn’t worth while applying for funding if the project would already be over by the time the process is complete. This is much quicker.”
The In-house Research, Development and Innovation (RD&I) Fund offers maximum funding of up to €650,000 and is primarily aimed at larger projects. “A lot more information is required than is the case for Agile Innovation Fund,” says Madden. “There is more due diligence involved and the level of challenge to be met is greater.”
Other supports available through Enterprise Ireland include innovation vouchers, which fund R&D collaborations between companies and third-level institutions and assistance in drawing down funding from the EU Horizon 2020 programme, SME Instrument.
Firms can also avail of attractive tax incentives in the form of the Research & Development Tax Credit (RDTC) and the Knowledge Development Box (KDB). “The RDTC provides a 25 per cent tax credit for every euro of eligible expenditure incurred by a company on eligible R&D activities,” explains Ken Hardy, head of KPMG’s R&D Incentives practice. “For example, if a company incurs €100,000 on an R&D project made of say €75,000 on salaries, €15,000 on materials consumed in the R&D activities, and €10,000 on allowable overheads such as rent, rates, utilities and so on, then that company can claim an RDTC in its annual tax return of €25,000 to €100,000 at 25 per cent”
The KDB applies a corporation tax rate of 6.25 per cent to income generated from the exploitation of royalties, licence fees, insurance and embedded intellectual property. “That is half the corporation tax rate of 12.5 per cent which applies to all other trading income,” says Hardy. “It is calculated by using a formula which includes the qualifying expenditure incurred on the qualifying asset, and the profit relating to the qualifying asset.”
The RDTC has been very successful since its introduction in 2004, according to Hardy. “In its first year, about 73 taxpayers utilised the credit, and this has now risen to, and stabilised at, approximately 1,500 claims annually,” he adds. “In 2009, the Government made a very positive amendment to this incentive which allowed companies who were not tax-paying in a particular period to encash the credits over a three-year period. This provided much-needed cash flow, but perhaps more importantly, it also allowed companies recognise the incentive against the R&D project costs in their accounts. This was particularly positive to the Irish operations of overseas multinationals as it, for the first time, allowed them reflect the true net cost of doing R&D in Ireland. A significant number of KPMG’s clients have commented that this amendment allowed them positively compete with other sister locations to attract mobile R&D investment into Ireland.”
The KDB, on the other hand, is a very new and unproven incentive, Hardy continues. “It applies from 2016 onwards and companies have until the end of this year to make their first claim,” he notes. “A small number of companies have availed of the incentive already, but given the nature of the legislation I believe it will have limited appeal – mainly to the indigenous sector where companies are doing all of their R&D in Ireland. I expect that the budgeted annual cost of €50 million is unlikely to be incurred.”
Hardy believes the RDTC could be improved. “The Revenue has engaged with stakeholders in recent times to discuss the practical aspects of the operation of the incentive regime, and to discuss suggestions for improvements that can be made,” he says. “In particular, KPMG would recommend that the Government should consider introducing a special RDTC regime for SMEs with an enhanced rate of credit of 37.5 per cent, perhaps capped at an appropriate level of qualifying expenditure. This special regime could borrow largely from the existing regime but with less onerous reporting requirements. We believe that such a regime could be implemented at a modest and measurable cost and would provide SMEs with a springboard for developing their R&D capabilities.”
Looking to the future, he says stimulating R&D and innovation in the economy involves a multi-faceted approach. “It takes time, requires commitment, and a long-term view. For Ireland to consolidate its success, and to build on a solid base, requires the continued supply of top-quality and relevant talent from our educational system and abroad, a competitive economy to attract capital investment, and an effective tax system that rewards investment and risk. Allowing companies to effectively exploit IP that they have developed or acquired is essential too.”