R&D will happen and so the R&D credit needs to make sure it happens here

On September 12, 1962 President John F Kennedy delivered his speech at Rice University's Rice Stadium. He said, “We chose to go to the Moon in this decade and do the other things, not because they are easy, but because they are hard”. Since then, many things have changed but the human desire to push the boundaries in everything we do has not. R&D will never stop, and we need to do everything we can to ensure that it happens here. That’s why Cathal Noone, my R&D tax partner, and I agree that our R&D credit has to be best in class. This year’s Finance bill will go for the President’s signature shortly and there are changes in there for R&D improve the regime.

Straight out the box, the R&D credit rate moves from 25% to 30%. Not too shabby for two reasons (1) any increase in a credit is good news and (2) it preserves the benefit for companies that are subject to the 15% rate (also generally referred to as “pillar 2” after the OECD rules that started this off) and which will kick in on New Year’s Day for those companies (think corporate groups with annual revenue of €750 million). This is because the R&D credit will become part of such company’s income and subject to the global minimum tax rate of 15% under those rules.

The Minister for Finance, Michael McGrath noted at the Committee Stage of the Finance Bill that it was important to underline the strategic importance of the R&D credit for Ireland. He explained that “We have made the policy decision to sign up to pillar 2, that is, to increase our corporation tax rate. If we did not make the change to the credit, it would represent a dilution of the benefit of the research and development credit because it would effectively be now regarded as income - as a grant - rather than being a credit. That would unquestionably reduce Ireland’s attractiveness relative to other countries. Other countries are going as far as they possibly can to support research and development activity. We have been very successful in winning FDI”.

The Minister has previously referred to the 15% tax rate as a “once in a generation reform” as part of his recent Budget speech and I’d agree given the substantial amount of legislation that was included in the Finance Bill to bring it into law. On a personal note, I took over the authorship of a leading text on corporation tax a number of years ago and it was recently suggested to me that this year’s edition might need a second volume to deal with these changes. We will have to see on that one!

But back to R&D, in addition to the rate increase I mentioned earlier, the Finance Bill provides for an increase in the first-year payment threshold from €25,000 to €50,000. This means the first €50,000 of an R&D credit can be paid in full in the first year of the claim rather than having to be spread over the normal three-year period. As such these changes will be a valuable cash flow support to companies engaged in smaller research and development projects.

There are also changes to the treatment of tax credits for group companies that have an entity that ceases to continue undertaking R&D activities. The changes in the scheme are intended to allow another group company to claim R&D tax credit instalments due, where the original group company has ceased undertaking R&D activities and another group company commences undertaking the R&D activities.

The Bill also brings about also some administrative provisions to the R&D credit. One of these is the introduction of a new pre-filing notification requirement which will apply to companies claiming the research and development corporation tax credit for the first time and companies that have not filed a claim in the previous three years. Minister McGrath explained at the Bill’s Committee stage that “the purpose of this pre-notification is to enable resource planning in Revenue to facilitate efficient processing of claims.”

The issue of the cost of this regime was discussed at the debate. The Minister noted that the most recent figures available in connection with the R&D credit were 2021 numbers. The Minister explained that “Some €753 million was spent across 1,629 companies. September 2023 was when the final returns for 2022 would have come in. In April 2024, the figures for 2022 will be finalised and published. When looking at the profile of the companies that are claiming and the spread of case, while it is true to say the majority of the cost is in respect of what one might call larger companies, employing 250 people or more, more than 500 of the 1,600 companies have less than ten employees. Almost one third of the companies claiming the research and development credit have less than ten employees”. He continued “About another third have between 11 and 49 employees”. I’m on Scale Ireland’s Steering Committee and CEO Martina Fitzgerald expressed her view that “The increase in the R&D credit rate will incentivise increased R&D activity and spending in our sector”.

The Minister continued that “Of that 1,629 claimant companies in 2021, we believe almost 700 are in-scope of pillar 2. It is not a small number of companies. They collectively employ probably hundreds of thousands of people. It is an im¬portant issue for Ireland in terms of our attractiveness as a country for inward investment.”

The changes made in this year’s Bill are important and the numbers using the credit complete the picture saying how widely it is used by companies large and small. This year’s Bill increases the attractiveness of the relief, it’s there to be used by those who qualify. Of course there are Ts and Cs, but going to the moon is not a requirement!

Please note this article first featured in the Business Post on Sunday, 10 December 2023 and was re-published kindly with their permission on our website.