External forces are having a profound impact on the R&D decision-making process. Rising costs and market uncertainty are making it more and more difficult for organisations to set strategies even for the medium term.
“We have spoken to a number of our clients and the sense that we are getting is that the current level of uncertainty is making it very difficult for senior managers to plan at a strategic level,” says Mazars tax partner Gerry Vahey. “The planning horizon has been shortened to the near term.”
Rising costs also come into play. “R&D in Ireland is becoming more and more expensive,” he adds. “Most R&D in Ireland is in the software area and there is a severe shortage of software developers at present. Inflation comes into it, but it has more of an effect on wage costs. This results in an increase in long-term fixed costs as you don’t tend to get deflation in wages whereas you can in commodities and other raw material costs.”
There is a move therefore to invest in the development of technologies that will maximise the value of expensive human resources.
“One of our manufacturing clients is talking about the move to Manufacturing 5.0,” says Vahey. “This is the advent of the cyborgs. Manufacturing 4.0 was all about the internet of things and getting machines to talk to other machines. Manufacturing 5.0 is about the reintroduction of the human touch. This makes sense. In future, instead of having machines designed to outstrip human intelligence, we will have complementary AI which will support humans in the performance of their work.”
In short, industry 5.0 is about efficiencies and getting more out of existing resources in a climate where technology is getting cheaper, and labour is getting more expensive.
New products
R&D activity will continue, despite the changed environment. “People will always invest in R&D,” Vahey points out. “Every business needs to innovate. It’s not necessarily about developing new products. It’s about finding ways to do things differently. Companies have got to be more nimble at the moment. They can’t put in place a system that will do for the next 12 to 18 months if they don’t know what the landscape is going to be like in three months’ time. People don’t know what’s going to happen. We will see fewer larger, longer-term R&D projects and more small-term projects.”
He explains that the nature of the current uncertainty means companies will ask themselves if there is a need for the next version of a product planned for launch next year. They might choose to release a slightly updated version in a few months’ time instead.
They also need to be very careful to pick the right areas to invest in. “You can’t afford to get it wrong in the current climate,” says Vahey. “There will be less blue skies R&D and more applied R&D.”
R&D projects will also be harder to sell internally. “People will be asked if the project will pass muster. How does the landscape for R&D activity in Ireland compare with other countries? Ireland is just one player in a very competitive environment. Multinationals look at the whole landscape before deciding on the best place for R&D investment.”
The R&D tax credit regime is critically important in that respect. “The 25 per cent tax credit helps to de-risk R&D projects,” Vehey explains. “It reduces its effective cost to 67.5 per cent after the 12.5 per cent corporation tax is taken into account. The regime is broadly competitive internationally, but these things are never set in stone. There have been moves to enhance it for SMEs, but we are still waiting for those changes to come in.”
He also points to a difference between the UK and Irish R&D tax credit regimes. Under the UK scheme, the revenue authorities only have two years to review past claims, in Ireland it is five. “That’s a very long period. It also presents challenges for companies to show what they were doing five years ago. For example, in Mazars we have a policy of deleting emails after two years due to data protection considerations. This feeds into the uncertainty for companies. And businesses abhor uncertainty.”