The Research and Development (R&D) tax credit is one the most successful tax-based incentives in modern times with almost all 38 members of the Organisation for Economic Cooperation and Development (OECD) having some form of tax-based incentive for companies that engage in R&D. Indeed, in a recent review of the R&D tax credit published by the Department of Finance, it was reported that Ireland’s R&D tax credit ranks amongst the most attractive across OECD countries.
Last week, the Department of Finance published its ‘Research and Development Tax Credit and Innovation Compass’ (“the R&D Compass”). This fulfils a commitment made both to stakeholders who contributed to last year’s public consultation (which the Institute responded to here), as well as to the wider electorate in the Government’s ‘Action Plan on Competitiveness and Productivity’.
The R&D Compass identifies four broad directions for future policy work:
- Qualifying Expenditure,
- Capital Expenditure,
- Administration and Simplification, and
- Supports for Innovation.
These four broad areas have been used to identify nine specific measures which will be examined under the R&D Compass. These include a holistic review and examination of the sub-contracting provisions, determining whether there is merit to including additional categories of qualifying activities, examining options to accelerate the payment of the R&D tax credit, and a review of the Knowledge Development Box (KDB).
It is clear that the R&D tax credit will remain a cornerstone of our tax code for some time to come, and the R&D Compass will provide a foundation for the next phase of development and review of the R&D tax credit in Ireland. The relief is integral to Ireland’s overall economic model, not least of all in incentivising the R&D activities of the key multinational enterprises that operate from Ireland. However, we consistently receive feedback and indeed provide feedback that the administrative burden for smaller enterprises needs to be examined as a matter of priority.
The data consistently shows that while small and medium enterprises (SMEs) account for the vast majority of claims in terms of number (typically between 85 to 90 percent of total claims), they account for about a quarter of the overall cost to the Exchequer annually. While this aligns with corporation tax data on the nature of receipts generally, it does beg the question on what could be done to further incentivise SMEs to engage in higher-value R&D. The R&D Compass does include commentary in this regard, including encouraging public-private collaborations and enhancing the opportunity to engage sub-contractors.
It is worth commenting on the possibility of a relief that will reward innovation. This acknowledges that some innovative activities, while central to our economy, do not resolve uncertainty in the manner required for the purposes of the R&D tax credit. Therefore, an innovation-based relief would enable the Oireachtas to target specific areas where innovation should be supported but where there is no scientific uncertainty to be resolved. It is therefore likely that an innovation-based relief will be broad-based in terms of qualifying activities but narrow-based in terms of the specific sector or industry targeted. A clear focus of any such relief should be toward decarbonisation and green objectives or the digital transformation.
When publishing the R&D Compass, the Tánaiste and Minister for Finance, Simon Harris noted that the “Compass identifies areas that will be reviewed further over the term of this Government, with the specific direction of travel in each of those areas to be determined as relevant analysis is completed”. As such, time will tell what will be first on its list of priorities, and what can be achieved with enough ambition and courage to support R&D activities on the island and as always Chartered Accountants Ireland will be engaging with Government each step of the way.
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