Revenue’s annual report was published recently. It was accompanied by various statistical analyses and research reports which included details of Corporation Tax 2022 Payments and 2021 Returns. Much has already been written in connection with the cash brought in by Corporation Tax and so this column will focus on the R&D section of that document. In a nutshell the benefit of the R&D Tax Credit is that it reduces the costs of undertaking R&D in Ireland by 25%. Where a tax deduction can be taken for the expenditure incurred in computing a company’s trading profits then the benefit to the company concerned can be 37.5% of the expense concerned. Of course, significant Ts & Cs apply.

A tax credit regime may not determine whether a company undertakes R&D in the first place, but it may be a factor in determining where the R&D is organised, in addition to issues such as: wages costs, infrastructure, political ethos etc. Humans are naturally curious and like to solve problems and therefore the more attractive Ireland is as a location for R&D the better. Revenue’s report shows a €95 million increase (from €658 million to €753 million) in the cost to the Exchequer of the R&D credit between 2020 and 2021 tax returns. It’s too early yet for 2022 tax return information as companies with a December 2022 year end don’t have to file tax return until later this year. Revenue’s report notes that the credit’s cost is now at its highest level since the credit was introduced in 2004. The number of companies claiming the credit increased marginally from 1,616 to 1,629. More qualifying R&D being done is a good thing.

Further, the value of R&D expenditure for 2021, against which tax relief is claimed, was €3.5 billion in the year and most of this expenditure “occurred in a relatively small number of sectors”. Revenue’s report explains that of the €3.5 billion expenditure, €2.9 billion was by foreign-owned multinational companies. R&D credit expenditure by Irish-owned multinationals was €242 million, non-multinationals accounting for the remaining €299 million. Revenue explains that this number only includes R&D where the expenditure is eligible for the tax credit. That’s important in that it doesn’t highlight what wasn’t claimed and that can be down to the expenditure not qualifying or indeed the complexity of the relief in the first instance.

The Commission on Taxation and Welfare suggested in its report that “specialist resources and capabilities be allocated to the Revenue Commissioners, and the Department of Enterprise, Trade and Employment and its agencies to develop an advance assurance mechanism in order to enable wider access to tax incentives such as the Research and Development tax credit and Employment Investment Incentive”. You can see their point and I’ve written previously in these pages about the EII.

So, let’s talk SMEs, scaling companies and R&D for a minute. I was chatting with my colleagues on our R&D tax credit team during the week after seeing the Revenue’s document and we came up with a few suggestions. Due to the complexity in this relief a pre–approval process should be introduced for SMEs. This would bring a level of certainty to such companies claiming the relief. Certainty is important given the penalties for the getting the claim wrong.

Further, there are differences in the definition of R&D for the purpose of grants applications and the R&D tax credit, but the two definitions are very close. With a view to minimising the burden of engaging experts to verify the “science test” which is part and parcel to an R&D tax credit claims, Revenue have stated as part of their guidelines that they would not, “as a rule,” seek to challenge the science test in relation to a project where:

(i) an Enterprise Ireland, Horizon 2020, or IDA R&D grant has been approved in respect of the R&D project;

(ii) the project is undertaken in a prescribed field of science or technology;

(iii) the company is a micro or small enterprise within the meaning    prescribed EU Commission Recommendation; and

(iv) the total R&D tax credit claimed by the company for an accounting    period (of not less than 12 months) is €50,000 or less.

That’s a good move but we’d suggest maybe upping that R&D credit limit. We need to make the R&D credit as attractive as possible because today’s micro or small enterprise may go supernova tomorrow.

Consideration should also be given to introducing increased credits for additional categories of expenditure. This would be a significant step in ensuring Ireland remains competitive vis a vis its competitors.

Last year’s Finance Act brought about certain changes to regarding the refundability of the R&D tax credit so that such credits should be treated as a “qualified refundable tax credit” for the purposes of the forthcoming new rules in connection with the 15% rate of corporation tax. The latter only applies for certain corporate groups with revenues of over €750 million. But as part of that move changes were brought about to allow companies to claim up to €25,000 or 50% of an R&D credit claim in the first year. The €25,000 cash threshold was welcome but is too low to be of benefit to small and scaling companies. That threshold represents €100k of R&D expenditure incurred by a company in order to get the credit fully refunded in the first year. Arguably a drop in the R&D expenditure ocean.

Ron Suskind’s book, “The Price of Loyalty” tells the story of Paul O’Neill (former US secretary of Treasury) saying “you find someone who says, ‘I do more R&D because I get a credit for it’, you’ll find a fool”. R&D will happen because of the human condition but as I said earlier the key is where that R&D happens. Let’s make more of it happen here.
 

Please note this article first featured in the Business Post on Sunday, 14 May 2023 and was re-published kindly with their permission on our website.