Irish SMEs are increasingly focusing on research and innovation to improve productivity and to help them compete in a rapidly changing world. However, cost and other pressures create real barriers to innovation for SMEs, but targeted supports and tax incentives can make R&D more achievable than many assume.
The biggest barrier facing SMEs starting out is the high cost of R&D in Ireland, says Stephen Merriman, R&D tax partner, PwC Ireland. “Rising salary costs and infrastructure pressures elevate the risk of undertaking R&D. These can discourage companies investing in R&D activities. Talent constraints and difficulty attracting skilled labour are other key challenges SMEs are experiencing. The Irish R&D Tax Credit (RDTC) and other grant funding incentives help in reducing these risks in carrying out innovative projects in Ireland.”
To qualify for the R&D Tax Credit, SMEs need to carry out work that addresses a genuine scientific or technological uncertainty and aims to achieve a scientific or technological advancement, says Merriman. “The R&D work should be structured, systematic, and carried out by skilled R&D staff as part of the company’s Irish operations. Just as important, businesses must keep simple but thorough technical and financial records to support their R&D claim and ensure compliance.”
There are several misconceptions which continue to hold SMEs back from fully engaging with the RDTC, says Ian Collins, EY Ireland tax partner and head of innovation incentives. “Firstly, many assume it is reserved for white-haired scientists tinkering with test tubes in labs – and thus a huge amount of qualifying activity is often overlooked. The definition of R&D is very broad, and in our experience can include producing new, or improving existing, materials, products, devices, processes, systems or services.
READ MORE
“Another misconception is that qualifying R&D needs to be successful to qualify; this is not the case. In reality, failures are often a very strong indicator of potentially qualifying activity.”
Finally, though it is referred to as a tax credit, it is in fact a cash refund, says Collins. “From 2026, any qualifying R&D spend will now be refundable at a rate of 35 per cent - in what is already a very competitive space globally, this is regarded as a very advantageous rate.”
For many SMEs, the administrative requirements associated with claiming the RDTC can be a deterrent, explains Collins. “While the incentive can be highly beneficial for SMEs, the complexity of administrative requirements often places smaller firms at a disadvantage compared to larger organisations; a more streamlined approach would help level the playing field. Ireland currently operates two parallel systems for R&D support: grant aid through IDA Ireland, Enterprise Ireland, and Local Enterprise Offices, and the RDTC, administered by Revenue.
“A streamlined approach, where eligibility under one State R&D support scheme automatically confirms eligibility under the R&D Tax Credit, would reduce administrative burdens and free up capacity within these businesses to focus on innovation rather than paperwork.”
For SMEs, cashflow is often the difference between scaling and stalling, Merriman says. “The RDTC is unique in that businesses must claim money back from Revenue, with repayments spread over three years. For many early-stage, pre-profit companies, this timeline can often be too long.
“Shortening the current three-year refund timeline to one year would significantly improve cashflow for early-stage businesses, making the incentive more impactful and encouraging greater participation from SMEs.”
Innovation is a strategic necessity for businesses of all sizes who are seeking to remain competitive in a rapidly changing market, Collins says. “For SMEs, the key is to start small and make use of the supports available. Innovation does not always mean creating a new product from scratch, it can involve improving existing processes or adopting new technologies.”
Start small and look to combine all available supports such as the RDTC with Enterprise Ireland grant funding, agrees Merriman. “This can help reduce the cost of R&D and early-stage development. Further, tap into university collaboration for specialised expertise and equipment. It is important to build your network to help strengthen the company’s R&D and innovation.”
