Less than a decade ago the Government offered business a further tax incentive to enhance Ireland's attraction as a place to invest, and expand. The change benefited innovative companies – in areas like financial services, science and pharmaceuticals – by allowing them to avail of tax credits for their research and development activities. Companies could claim up to 25 per cent of their R & D spending either in cash, or as a tax credit. For the State, the tax credits were designed to generate high quality employment in Ireland, by giving companies a financial incentive to carry out more research work here, and less abroad. The combination of a low corporate tax rate, allied to generous tax credits that further reduced the tax bill of these companies, achieved two policy aims. Ireland has managed to retain its competitive edge in attracting new foreign direct investment, while more research and development activity is being conducted here. But at what price?

Since 2004, when the tax credit scheme was introduced, the number of companies using it has soared – as has the cost to the exchequer. Then fewer than 50 companies availed of the scheme, rising to more than 1,200 by 2010. In the same period the cost in tax revenue forgone has risen from €80 million to some €225 million in 2010. The Revenue Commissioners, after conducting an audit of how some companies have used the tax credit, are greatly concerned by what it has found: 26 of the 32 companies examined have claimed the tax incorrectly, which has resulted in the exchequer recovering €6 million. Most of the incorrect claims made involved “accounting errors”.

Nevertheless, even in such a limited sample, such a high level of non-compliance is worrying, and raises two obvious concerns. Why, given the increased usage by so many companies of the tax credit for R&D – a 25-fold increase in nine years – has the scheme received so little critical scrutiny? And what might a full audit of all companies that benefit from the tax concession reveal in terms of tax revenue foregone? The Revenue Commissioners have recently developed a greater capacity to investigate companies claiming the tax credit – by using scientific and technical experts to examine whether they are involved in genuine research and development. But when such a significant and costly tax concession is given to encourage R&D activity in Ireland, its potential for abuse seems not to have been identified, and closely monitored to ensure that companies claiming the tax concession have fully complied with the tax law. The Government, as part of budget 2013, announced a comprehensive review of the operation of research and development tax credit. And, given what this newspaper has revealed about aspects of its operation, such a review was clearly long overdue.