Ireland has become one of the leading research, development and innovation (RDI) countries in the world and the Government is pumping large amounts of money into establishing it as a “global innovation leader”, says James McMahon, director, tax, at Grant Thornton. “Research and development (R&D) has played a major role in the growth of the Irish economy in recent years and the government has shown continued support for investment in R&D and innovation across the Irish economy.
“Most notably, this is evidenced by the R&D expenditure by the Government reaching almost €867 million in 2020. This is expected to reach €949.1 million in 2021, according to data from government.” On top of that, 73 per cent of innovation expenditure came from foreign-owned companies in Ireland. While this is a positive development, additional supports are encouraged to increase R&D spend by indigenous businesses, says McMahon.
“Recently there was a public consultation into the R&D tax credit and knowledge development box [KDB] run by the Department of Finance,” says Ken Hardy, head of R&D incentives practice at KPMG. “The consultation is part of the rolling three-year review of the R&D tax credit which seeks to ensure the continued effectiveness of the credit at fostering the attractiveness of Ireland as an international hub for R&D.
“The department considers R&D as a key input to innovation, which in turn is a key driver of productivity and long-run economic growth.”
The input from the consultation process carried out is to be considered in the context of this year’s budget and Finance Bill, says John Burke, tax manager at Mazars. The objective of the KDB is to encourage companies to develop intellectual property in Ireland.
“The KDB is a corporation tax relief whereby profits earned from exploiting ‘qualifying assets’ may be taxed at 6.25 per cent [ie half the 12.5 per cent tax rate].” Qualifying assets are assets created from “qualifying R&D activities”. Intellectual property is a qualifying asset and includes computer programs and inventions protected by a qualifying patent.
While the R&D tax credit supports businesses throughout their R&D journey, the KDB supports businesses who commercialise their intellectual property, says McMahon. “Once a business qualifies for the KDB, they can reduce their effective tax rate on that line of income to 6.25 per cent, which is a 50 per cent reduction.”
However, Burke says that the take-up of the KDB has been very low. “Extending the KDB regime to other assets [‘trade secrets’ and ‘know-how’] would open it up considerably.”
Funding opportunities
“Nationally, Ireland has a well-developed ecosystem for funding research and development including grants, tax credits and the knowledge development box,” says Hardy. “Exchequer funding is a significant driver to industrial R&D, often underpinning future business enterprise expenditure on R&D. There is a variety of funding mechanisms for companies for research and development.
“Micro-enterprises can avail of feasibility studies or the agile innovation fund from the local enterprise offices [LEOs]. SMEs with export potential can also access the agile innovation fund or the research and development fund from Enterprise Ireland.”
McMahon says Enterprise Ireland and the IDA are two government bodies that support R&D by offering grant aid. “The new InvestEU Fund is an example of European support and it offers equity, loans and guarantees to support innovation and job creation in Europe. The European Innovation Council is another European fund that offers a combination of grants and equity to encourage innovation building or technological breakthroughs.”
Gerry Vahey, tax partner, Mazars says that at a European level, a range of international research programmes designed to foster collaborative cross-border research between companies in different member states are available. “Most notable is the EU’s research and innovation funding programme, Horizon Europe [formerly Horizon 2020], with its budget of over €95 billion.”
“At EU level, the Life programme is targeted at projects that develop and demonstrate innovative techniques and approaches related to environmental and climate action, eg work that contributes to the shift to an energy-efficient, renewable energy based, and climate resilient economy or seeks to halt and reverse biodiversity loss,” says Damien Flanagan, partner, R&D incentives practice at KPMG.
Downsides
While it can seem there are only upsides to getting funding, Flanagan says, “In reality, grant funding comes with a number of trade-offs. Most R&D grant funding is prospective, technically prescriptive and competitive.
“In rapidly changing industries, the prospective and technically prescriptive nature of the grants can often be a challenge to fully complete due to commercial pressures or technological advances.” He says the competitive nature of the funds often means that inexperienced applicants find the process daunting and ultimately unsuccessful. In addition, if successful, there is an administrative overhead for companies.
Death and taxes
With great funding comes great … auditing. Vahey says a key area of focus for Revenue is the maintaining of documentary evidence and tracking progress on a project [eg time sheets of staff detailing R&D activities; identifying at what point were the associated uncertainties overcome and tracking same]. “Revenue audits can challenge even the most robust R&D tax credit claims in terms of substantiating the merit of the underlying R&D activities and the associated costs.”
“Best practice is that you ensure you are prepared for a Revenue audit before you file an R&D tax credit claim,” says Flanagan. “Make sure you are comfortable that the claim is robust enough to withstand a rigorous Revenue audit from both a science and accounting test perspective.”