The role of R&D tax credit in the ICT sector
Highlights the challenges faced in claiming R&D Tax Credits for companies in the ICT Sector.
Ireland is the second largest exporter of computer and IT services in the world and the ICT sector is a key driver for the Irish Economy.
With a highly creative and talented workforce, an open economy and a competitive corporate tax environment, Ireland has successfully attracted eight of the top 10 global information technology companies to establish a significant presence here. Research and development is the life blood of these companies.
The rapid transformation of technology creates a sense of urgency and opportunity for ICT companies in Ireland. These companies are constantly engaging in innovative activities, change is embraced and adapting to new technologies is the norm. These include new ways of automating processes or delivering improved services. Cutting edge methods and techniques are introduced at such a rapid rate, that what requires research and development one day is a routine activity the next (for example cloud computing or virtualisation). The on-going challenge for ICT companies often lies in how these technologies scale and integrate with legacy systems.
There is potential for development activities undertaken by ICT companies to be classified as research and development. However, there is an inaccurate perception that qualifying R&D is only carried out in laboratories by men and women in white coats and goggles. While these types of activities certainly can benefit under the scheme, its scope is far broader. It is also worth noting that the definition of R&D for the purposes of the tax credit can often be quite different to a company’s own understanding of the term. In our experience, it is worth investigating if activities qualify for research and development tax credits, if they include the design and development of innovative integrated hardware and software systems, new architectures and network topologies, complex software algorithms or mathematical solutions and models.
Challenges faced for ICT in claiming the R&D Tax Credit
- In many industries, such as Pharma or Manufacturing patents are a benchmark for the state of the art in the industry. The challenge that the ICT industry faces is in establishing the state of the art. This is due to the rapid rate of change in the industry. Patents can take years to be published and the strength of the open-source community means that there not widespread acceptance of this benchmarking technique within the industry.
- The agile development methodology was proposed in 2001 and is now an industry standard, however using this approach with sprints and incremental development focused on quick responses to change and continuous development can make it difficult to determine the start and the end of the technological uncertainty. Typical research and development methodologies in other industries utilise a waterfall methodology with clearly defined phases and makes it easier to document research activities. In ICT one sprint could be focused on the development of novel system architecture, the next on a user interface feature, the next on database design. Capturing which sprints are related to the technological uncertainty can be challenging.
- The ICT sector delivers services across all industry sectors. Software is constantly being developed and new features are being added to the software. While the new feature could be novel for the customer or end user, it may have been a routine development once the specifications have been defined. The challenge is to determine the technological advance in relation to this feature in order for it to qualify as research and development.
In Deloitte’s experience, many ICT companies in Ireland are carrying out qualifying R&D activities. However, some companies are carrying out qualifying R&D activities on shop floors and within design offices without either realising it or appreciating the extent to which they are undertaking it. Contact us below if you need help determining whether you have qualifying research and development.