Following Budget 2014, the Department of Finance (the “Department”) published a review of the Research and Development (“R&D”) tax credit regime in Ireland. This article provides a general overview of the key findings of the review and notes some shortcomings of the regime which have yet to be addressed.
By way of background, the R&D review comprised of a number of different components and together the findings of each component form the basis for the report prepared by the Department. The research undertaken included analysis of data from the Revenue Commissioners, an independent survey of R&D active companies, a public consultation process and a detailed comparison of R&D tax incentives available in other jurisdictions.
The key findings of the review can be summarised as follows:
- The total amount of tax credit claimed on R&D in 2011 amounted to approximately €552.8 million;
- The cost of the R&D regime to the Exchequer in 2011 was €267 million;
- 40% of the participating firms described themselves as multinationals and 60% as indigenous Irish organisations;
- The dominant economic sectors among the survey respondents were manufacturing (46%) and Information and Communication (23%);
- Over 30% of the responding companies stated that they engage in outsourcing in respect of R&D projects;
- 70% of R&D claims were by companies with less than 50 employees; and
- Large companies with employees of more than 250 employees account for less than 10% of the R&D claims. However, they accounted for more than 45% of the claims on a monetary basis.
As part of their review process, the Department received over 20 submissions from interested parties, the vast majority of which were positive and referred to the R&D tax credit as an important aspect of Ireland’s corporation tax offering. Specifically, the report outlined that the following points were common to all of the submissions:
- Base year expenditure: A number of submissions requested the removal of the base year spend restriction as it imposes a requirement to maintain records dating back ten years which can be a significant practical and administrative issue.
- Outsourcing: Many of the submissions stated that the current cap on outsourcing of 15% of total R&D expenditure may be affecting a company’s ability to carry out additional R&D as outsourcing is often necessary as R&D requires specialist staff.
- Key employee incentive: The report highlights that the take-up of this incentive has been very small. Many of the submissions called for the extension of the incentive to all employees, including directors and those not necessarily involved in R&D.
- Payable credit: A number of submissions requested that the cash refund be made in one instalment, rather than the three instalments it is currently made over.
- Sectors: Some of the submissions stated that the R&D credit should be better targeted to small and medium sized firms.
- Definition of qualifying activities: The submissions conveyed general satisfaction at the breadth of activities covered by the definition of qualifying activities.
- Definition of eligible expenditure: There was a broadly positive view of the types of expenditure that qualify for the tax credit in Ireland. However, a number of submissions expressed concern over indirect costs that can be included. It was suggested that additional Revenue guidelines may be preferable to legislation.
While the overall findings of the report were positive, the current R&D tax credit regime has a number of deficiencies which must be addressed, for example:
- The base year restriction continues to impose a burden on many companies restricting their ability to claim the R&D tax credit and it should be removed;
- The current cap on outsourcing may be affecting a company’s ability to carry out additional R&D and should be increased;
- The key employee incentive is too narrow in its scope and should be extended to all employees and to loss making companies;
- To improve cashflow, any refund of the R&D tax credit payable to a company should be made over one instalment rather than the three instalments it is currently made over;
- Greater clarification is required in relation to the types of indirect costs that can be included in a claim for the R&D tax credit. The Revenue Commissioners have stated that indirect costs are allowable, however, they have not outlined what costs can be regarded as indirect costs; and
- Greater alignment is required between the various State bodies, for example, Enterprise Ireland and the IDA, in processing claims for grants and the R&D tax credit. Rather than making separate claims to each State body, it would be preferable to have a centralised system whereby claimant companies submit details of their R&D expenditure and activity to one State body and thereafter receive a simple confirmation as to whether they are entitled to any grant and/or tax credit in relation to their R&D activity and expenditure.
While the Finance (No. 2) Act 2013 has introduced a number of improvements to the R&D tax credit regime in Ireland, such as an increase in the amount expenditure on R&D activities that can be excluded from the incremental basis of calculation from €200,000 to €300,000 and an increase in the amount of R&D that can be outsourced from 10% to 15%, not all of the shortcomings associated with the regime noted above have been addressed. Accordingly, this should be an area of focus for the Department in advance of Budget 2015.