Three key enhancements to the research and development (R&D) tax credit regime were announced by the minister in Budget 2014. The stated intention is to implement some of the recommendations from the ‘Review of Ireland’s Research and Development (R&D) Tax Credit 2013’ report which was published alongside the Budget.
Review of the regime
The report concludes that the Irish R&D tax credit regime is among the “best in class” internationally. In terms of foreign direct investment, the report notes that the R&D tax credit effectively reduces the cost of undertaking R&D in Ireland by 25%. In particular, the introduction of an encashable tax credit in 2009 has increased the attractiveness of the regime by enabling recipients
to monetise unused credits. A total of 60% of survey respondents on which the report is based, indicated that they would have invested less in R&D if it had not been for this credit.
The R&D tax credit currently supports over 1,400 companies which, between them, have a turnover of nearly €100 billion and employ almost 150,000 people. The credit also supported 70% of business expenditure on R&D in 2011, which stood at €1.86 billion.
The ability to account for the R&D credit ‘above the line’ is crucial to the success of Irish subsidiaries of multinational companies win mobile R&D, and also helps to mitigate a natural bias whereby multinational companies might otherwise tend to locate R&D in high-tax jurisdictions to optimise the benefit from the associated expense deductions.
The credit has also helped traditional manufacturing companies win R&D investment from parent companies. In fact, over a quarter of companies surveyed for the report indicated they would have lost R&D projects to other locations in the absence of the R&D tax credit. Despite the foreign direct investment advantages of the credit, it is notable that 60% of claimants surveyed were indigenous companies.
Recommendations
The report set out the following recommendations:
- The “2003 base year threshold” (whereby companies need to maintain records for more than 10 years in order to support claims and the claims themselves are calculated on an incremental basis, by comparing the amount of R&D expenditure in a year with expenditure in the “base year” of 2003) creates an administrative burden for companies. Consideration should be given to phasing it out when resources allow.
- The outsourcing limits (whereby the amount of expenditure on R&D outsourced to third parties which is eligible for the credit is limited) should be relaxed. The outsourcing limits should be reviewed on an ongoing basis as business processes change.
- Given the overlap in State support for R&D by companies in terms of grants and the tax credit, the Departments of Finance, Public Expenditure and Reform, and Jobs, Enterprise and Innovation should work closely to ensure that the policy outcomes of all the different government supports are aligned.
- The “key employee” provision (whereby a company may surrender part of its R&D tax credit to key employees who may then use the credit to reduce their own income tax liability) should be kept under review. Any barriers to take-up of this provision should be addressed where appropriate.
- The Revenue data indicates that the take-up of the R&D incentive has improved considerably since the introduction of the encashable tax credit in 2009 and it is recommended that the incentive be kept under review.
Changes to the regime
As a result of the findings in the report, the minister has announced the following changes to the R&D tax credit regime:
- An increase in the outsourcing limit from 10% to 15% of the in-house R&D expenditure. This welcome measure has been announced with the stated aim of helping small companies to invest in R&D (as they are more likely to have insufficient resources in-house to carry out their own R&D and are more likely to need the support of third parties to undertake discrete R&D projects).
- Prior to the Budget, the first €200,000 of qualifying R&D expenditure could benefit from the R&D tax credit without reference to the 2003 base year. The minister announced an increase in this minimum level of expenditure of €100,000. This measure will yield an additional benefit of €25K i.e. €100K x 25%. This measure has been announced with the target of reducing the impact of the 2003 base year on companies with significant R&D expenditure in 2003.
- Enhancements to the “key employee” reward mechanism. As identified in the report, the current mechanism presents a number of barriers. Some minor changes will be introduced to make it more effective.