Are you getting enough credit (tax credit, that is) for your R&D?

The Research & Development Tax Credit (RDTC) has been an important driver of innovation in the Irish economy since its introduction in 2004. Companies spending money on research and development activities may be eligible for the credit, which is calculated at 25 per cent of the qualifying expenditure. Where a company has no corporation tax liability, it may apply for the credit to be paid in cash in instalments over three years.

This is clearly a very valuable support for R&D, but the amount being claimed has actually declined in recent years, as has the number of companies in receipt of the credit. The cost to the exchequer of the credit was €670 million in 2016, down from over €700 million the previous year, and it is understood that it fell even further in 2017, possibly below €600 million.

Whatever the reason for this decline, the statistics are a cause for concern, according to KPMG partner Ken Hardy, who leads the firm's R&D tax incentives practice.

"It is one of the crown jewels when it comes to R&D promotion and our attractiveness as an investment location," he says. "[Former minister for finance] Michael Noonan described the credit and the Knowledge Development Box and the 12.5 per cent rate of corporation tax as the three pillars on which Ireland's incentives for innovation investment are based."

‘Large projects’

Damien Flanagan, also a KPMG partner specialising in R&D incentives, says the decline could be for a number of reasons. "Perhaps there were some large projects in 2015 and 2016 which have now been completed and that accounts for the fall," he says. "But we know that in reality R&D tends to be ongoing and reasonably steady within companies, so that is probably not the reason. Another reason could be that the overall level of R&D investment is falling, but that doesn't appear to be the case either from what we are hearing from our clients or seeing from the IDA foreign direct investment pipeline. A third reason could be that red tape and a lack of understanding of the nature of the credit could be putting potential claimants off. No one wants to see that happening."

The Department of Finance carries out reviews of the scheme every three years

Indeed, it would be a shame if a scheme which has been found by a Department of Finance review to be "best in class" would have its effectiveness undermined by misconceptions and administrative issues.

The Department of Finance carries out reviews of the scheme every three years. The first was in 2013 and found it to be best in class internationally, fit for purpose, and that it delivers good value for money to the taxpayer. The 2016 review was more limited in scope and focused purely on the scheme’s economic impact, but still found that it delivers a good bang for the taxpayer’s buck with €2.40 in investment generated for every €1 in tax foregone.

Qualitative analysis

The 2019 review is expected to commence shortly and should be concluded in time for the budget in the autumn. It is anticipated that it will be similar to the “full-scope” 2013 review in that it will be broader and conduct a qualitative analysis of the impact of the scheme.

Hardy expects the results will be similar to the 2013 results as well, and urges stakeholders to take part. “It is important that all stakeholders engage in the process,” he says. “While we pride ourselves on our innovation culture, we have to be concerned at the apparent decline in the uptake of the tax credit. The reasons for this need to be understood, and the review provides an opportunity for that. The review also affords companies the opportunity to communicate with the Department of Finance as to why the credit is important to them.”

There are some quite simple low-cost steps which could be taken to improve the attractiveness of the scheme, according to Flanagan. The first of these would be to make the cash payment to firms not liable for corporation tax payable over one year instead of three.

There are some limitations which could be relaxed at very little cost to the exchequer

“This could make a big difference to early-stage firms which are not yet profitable and cash-flow positive, and would make the scheme much more attractive to them,” he says. “This would not involve any significant additional cost to the exchequer. Consideration could also be given to increasing the value of the credit to, say, 35 per cent for smaller firms, perhaps with a cap on the amount which can be claimed at the higher rate. This again could be done at a very modest cost to the exchequer.”

Widen the scope

Another step would be to widen the scope of activity and the amount of outsourced work for which the credit can be claimed. “There are some limitations which could be relaxed at very little cost to the exchequer and again this would make the scheme more attractive, which would in turn stimulate investment in R&D and innovation. At a time when the tax take is increasing, these measures are affordable,” Flanagan adds.

Finally, Hardy points to the risk of red tape. “While we generally welcome the recent guidance issued by Revenue, the new suggested file layout for R&D Tax Credit claims actually looks for more information than previously required. Revenue has stressed that this is only a suggestion, but when you put guidelines in writing, some feel it is effectively mandatory and could be perceived as an increased administrative burden.”