Two important enhancements to the Research and Development Tax Credit (“RDTC”) were announced by Minister McGrath as part of the budget today. Ken Hardy and Damien Flanagan of our R&D Incentives team explain below.
The first enhancement is an increase in the rate of the RDTC from 25% to 30%. This increased rate would be available for all claimants, regardless of company size. This change, which builds upon the important enhancements to how the credit is utilised by claimants introduced in Finance Act 2022, is one of the most consequential changes made to the RDTC in the last 15 years.
As the Minister noted, there is a dual purpose to the increase. It is designed to maintain the net value of the existing credit for those businesses subject to the new 15% minimum effective tax rate resulting from BEPs Pillar two. It will also deliver a substantial benefit to SMEs and those companies outside the remit of Pillar Two.
The second enhancement is a doubling of the amount of RDTC available to be refunded to a company as part of its first year RDTC payment. This has increased from €25,000 to €50,000. This change is designed to provide quicker access to funding from the RDTC for companies with RDTC claims of less than €100k. This cohort of claimants generally makes up two thirds of the total RDTC claims filed each year. Coupled with the increase in the rate of the credit to 30% the acceleration of the repayment aspect of the RDTC will no doubt have a positive impact on the indigenous SME sector.
Both enhancements are expected to be relevant for claims made in 2025 in respect of 2024 R&D expenditure. We expect that the Finance Bill will provide further insights into the timing of the measure.
International tax landscape and changes to the RDTC
The international tax landscape has been altered substantially by changes introduced through BEPS OECD Pillar Two which will lead to many companies falling within a new minimum effective corporation tax rate of 15%. Therefore, the significance of Ireland’s 12.5% corporation tax rate, which has been vital to Ireland’s attractiveness as a location for foreign direct investment, will be reduced for many multinational companies.
However, this means that the R&D incentives Ireland has to offer take on more significance and will play a greater role in attracting investment from the world’s largest companies in the future. Along with today’s increase to the RDTC rate, Ireland has already safeguarded the RDTC by ensuring it meets the Pillar Two definitions of a ‘qualified refundable tax credit’, meaning it does not reduce the effective rate of corporation tax.
Indeed, the need for a best-in-class RDTC regime is more pronounced in Ireland. Larger economies have many more resources available to them, as well as larger universities and deeper talent pools, all of which position them well for R&D activities. Ireland’s RDTC must therefore be better to address the inherent disadvantages we face as a smaller economy.
European Innovation Scorecard
This is evidenced by the recently published 2023 European Innovation Scoreboard (“EIS”) (an annual survey of each country’s relative strengths and weaknesses in the Research, Development and Innovation (“RD&I”) space).
On the one hand the EIS lists Ireland as a “Strong innovator” with an overall score above the EU average. However, it also noted that Ireland’s performance lead over the EU is becoming smaller and flagged a decrease in government funding for business R&D since 2016.
Critical changes to Ireland’s RDTC were previously introduced by Finance Act 2022 to align the RDTC with international tax reforms and to ensure that the RDTC remains an important and relevant incentive for all claimant companies.
The RDTC is now repayable to all R&D claimants (regardless of tax paying position) in three instalments over three years. Companies with RDTC claims of more than €100k (€50k for periods commencing before 2024) will receive the three refunds over three years on a 50%: 30%: and 20% split.
Companies with tax credit claims below €100k (€50k for periods commencing before 2024), will get the refunds a bit earlier. The previous payroll tax restrictions which applied to the refundable element of the RDTC have been removed, so the entire RDTC amount is now refundable. The legislation now provides that a ‘valid claim’ must be made by the company before Revenue process any refund or offset.
In summary, Ireland has taken steps over the last two years to ensure it is well placed to continue to compete for international investment in RD&I. Tax incentives, such as the RDTC, will play a greater role in companies’ future decision making, given the harmonisation of corporate tax rates. We need to be alive to this as a country and continue to incrementally improve our RD&I incentive offering, as we have done over the last 20 years.
Get in touch
If you have any queries about the changes to the R&D regime announced in Budget 2024, please contact Ken Hardy or Damien Flanagan of our R&D Incentives team.
We’d be delighted to discuss the changes with you and how these may impact your R&D tax credit claim.