The Irish Tax Institute recently completed a Research & Development (R&D) Tax Credit and Innovation Survey.
The survey findings revealed several broad themes:
- The importance of having a competitive R&D Tax Credit rate.
- The need to simplify the claims process, in particular for SMEs, given the level of documentation required to support a claim and the cost involved in preparing a claim.
- Persistent uncertainty over whether certain R& D activities qualify for the credit and the anxiety among companies over the potential for Revenue to subsequently challenge an R&D Tax credit claim.
- The need to increase the existing caps on outsourced R&D activities to increase access to particular expertise and equipment.
The Institute’s submission outlined 18 key recommendations informed by the feedback received.
Institute Recommendations on the R&D Tax Credit:
- Continually benchmark the R&D Tax Credit against key competitor jurisdictions to ensure Ireland can continue to attract additional R&D investment.
- Increase the R&D Tax Credit rate to preserve and attract more R&D investment by large multinationals in Ireland and ensure Ireland can continue to compete internationally for global R&D investment, given the 5% increase only maintained the overall net value of the credit (25%) for companies subject to Pillar Two.
- Ensure Revenue compliance interventions in respect of R&D Tax Credit claims are proportionate, apply commercial awareness and are conducted in a timely and efficient manner.
- Simplify the Form CT1 (corporation tax return) to make it easier for businesses to comply with their tax obligations and have certainty over their R&D Tax Credit claims.
- Publish guidance on common errors identified in R&D Tax Credit claims and create information videos on how to complete the relevant R&D panels correctly.
- Use the existing in-house technical expertise within the two enterprise State agencies (i.e. IDA and Enterprise Ireland) to verify the science test in R&D Tax Credit claims.
- Increase the attractiveness of the R&D Tax Credit, in particular for SMEs, by:
- Condensing the current 3-year R&D Tax Credit refund to one year.
- Introducing a pre-approval process for first time R&D Tax Credit claims by small/micro companies.
- Providing SME-friendly guidance, with step-by-step instructions on the claims process and practical studies, together with tips on how to avoid common errors.
- Consulting with stakeholders in advance of updates to Revenue’s guidance to help to provide more tax certainty for claimants.
- Increase the limits on outsourcing to a third-party or university or institute of higher education. Consider removing the restriction completely for R&D outsourced to universities/institutes if higher education to encourage greater STEM skill-sets, while qualifying R&D expenditure outsourced to third parties could be capped by reference to the company’s qualifying internal R&D spend.
- Legislate for the existing concession on the use of agency/temporary staff.
- Permit outsourcing of R&D to a related party in circumstances where Ireland is the owner and has played an active role in managing and developing internally generated IP arising from R&D activities. A cap on the amount of related spend which qualifies could be set by reference to the Irish company’s own internal spend on R&D.
- Modernise the definition of relevant expenditure to allow expenses which are critical to R&D processes to qualify such as training and maintenance relating to R&D equipment.
- Simplify Revenue guidance relating to overhead costs.
- Introduce legislation to clarify that rent is a qualifying cost for the purposes of R&D Tax Credit, given rent is a substantial cost for most SMEs.
- Reduce the 35% threshold for R&D activities carried on by a company in a qualifying building or structure under section 766D of the Taxes Consolidation Act (TCA) 1997 given there is no de minimis for plant and machinery for the purposes of the R&D Tax Credit.
- Remove the stipulation that a building must qualify for industrial buildings allowance to meet the conditions for the credit under section 766D TCA 1997 to reflect the changing nature of how and where R&D activities are undertaken in a modern knowledge economy.
- Reduce uncertainty by developing industry specific guidance with detailed practical instances of what R&D activities qualify and do not qualify.
Institute Recommendations on options to support innovation:
- Consider introducing new targeted measures to incentivise innovation in specific priority areas of digitisation and decarbonisation.
- The following administrative oversights could ensure claims are made for true innovation:
- a Revenue pre-approval process for first-time claims by small/micro companies,
- availability of sector specific SME-friendly guidance, and
- ensuring the level of documentation required to support a claim is stratified according to business size.