The research and development tax credit in detail

Overview of the R&D tax credit

The R&D tax credit was first introduced in 2004 and since then has been amended and generally enhanced with each subsequent Finance Act. 

The rate of the R&D tax credit has been recently increased from 25% to 30% for accounting periods commencing on or after 1 January 2024. 

The tax credit operates on a group basis and is available to companies, within the charge to Irish tax, that undertake R&D activities in the European Economic Area (EEA) or the UK. The credit is available for expenditure which is allowable for a corporate tax deduction in Ireland, or would be so allowable but for the fact that for accounting purposes it is capitalised as an intangible asset. 

Key facts

1. The R&D tax credit is worth up to 30% of qualifying expenditure. 
2. This credit is available in addition to the trading deduction available for R&D spend. This can result in a net subsidy of 42.5% (i.e. 12.5% corporation tax deduction +30% R&D tax credit). 
3. Eligible expenditure can include expenses (e.g. salaries, materials consumed, overheads etc.) that are deductible for the purposes of computing corporation tax. 
4. Expenditure incurred on R&D activities outsourced to a third-party or third-level institution can be included in an R&D tax credit claim, subject to restrictions (see below for key points). 
5. Expenditure incurred on Plant and Machinery (P&M) can be classed as qualifying R&D spend. In order to qualify, P&M must be eligible for wear and tear capital allowances and must be used for the purposes of undertaking R&D activities. 
6. Expenditure on construction or refurbishment of a building used for qualifying R&D activity may also be classed as qualifying R&D spend. The credit is available for expenditure provided a number of conditions are met, for example the R&D activities carried on in that building over a period of 4 years must represent at least 35% of all activities carried on in the building. 
7. Expenditure met by grant assistance received from the State, the EU, or EEA does not qualify for the credit. 
8. Companies have 12 months from the end of the relevant accounting period in which to make a claim. 
9. Generally Revenue has 4 years from the end of the year in which the claim is made to commence an audit. 

All of the above are subject to certain conditions, which companies should investigate thoroughly with a tax advisor prior to submitting an R&D tax credit claim. 

Recent updates to the credit

Two important enhancements to the Research and Development Tax Credit (RDTC) were announced by the Minister for Finance as part of the Budget 2023. 

The first is an increase in the rate of the RDTC from 25% to 30% in respect of 2024 expenditure. This increased rate would be available for all claimants, regardless of company size. 

This change will maintain the net value of the existing credit for companies 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 the RDTC available to be refunded to a company as part of its first year RDTC instalment. This has increased from €25,000 to €50,000. This change is designed to provide quicker access to funding from the RDTC for companies engaged in smaller R&D projects.

Introduction of ‘Pre – Notification’ requirement for new RDTC claimant companies or companies that have not made an RDTC claim in the three previous accounting periods.

Where applicable, the following details must be provided to Revenue within a period of 90 days before the RDTC claim is made: 

1. The name, address, and corporation tax number of the company. 
2. A description of research and development (R&D) activities carried out by the company. 
3. The number of employees carrying on R&D activities, and 
4. Details of expenditure incurred by the company on R&D activities which has been or is to be met directly or indirectly by grant assistance or any other assistance. 

This update will mean that companies coming within the above rules will need to commence the RDTC claim preparation earlier.

e.g. For a new RDTC claimant company with a 31 December accounting period, under the existing RDTC rules, its deadline for filing its 2024 RDTC claim would be 31 December 2025. However, the prenotification rules require that the relevant details need to be submitted to Revenue before 2 October 2025. In effect bringing forward the claim preparation by a full three months. 

Use of the credit

• The current system, which firstly offsets the R&D tax credit against corporation tax liabilities, followed by three payable instalments (if insufficient corporation tax), is being changed to a new three-year fixed payment schedule i.e. 50% refund in year 1, with the balance being paid out in years 2 and 3 (effectively three instalments of 50:30:20). 
• The new system will apply for accounting periods commencing on or after 1 January 2023. There is an option to apply the new system for accounting periods commencing on or after 1 January 2022. 
• When a claim is made under the new rules, a company will no longer be able to offset the full RDTC against the corporation tax owing ‘in year 1’. 
• All claimants will now receive the R&D tax credit as a cash refund, rather than a direct offset it against their corporation tax liability. There is an option for the R&D tax credit instalments to be used to settle corporation tax, payroll taxes or any other taxes due (not directly offset but can be done by request) as the instalments fall due. 

Outsourcing R&D

Expenditure incurred on R&D activities outsourced to a third party or third level institution can be included in an R&D tax credit claim, subject to certain rules: 

• The company must notify the third party provider in writing that it cannot also claim the R&D tax credit for the work it has been contracted to carry out. From 22 December 2019, this notification must be made in advance of making the payment or on the date the payment is made. Where the outsourced activity is undertaken by a person who could not claim the R&D tax credit (for example, an individual, or by a non-resident 3rd party which does not have a branch in the State) then Revenue will accept that a notification is not required in these cases. 
• Payment to a third party is limited to the greater of 15% of the company’s overall R&D spend or €100,000. 
• Payment to a third level institution is limited to the greater of 15% of the company’s overall R&D spend or €100,000. For accounting periods ending before 22 December 2019, the relief is restricted to 5%. 
• The total amount claimed must not exceed the qualifying expenditure incurred by the company itself in the period. 

Buildings and structures

• Companies who build or refurbish buildings or structures for both R&D and other activities may claim an R&D tax credit in respect of the portion (as appears to the Revenue to be just and reasonable) of the construction/refurbishment costs that relate to R&D activities. 
• A minimum of 35% of the building must be used for conducting R&D activities for the first 4 years. 
• The building must be used for R&D for a period of 10 years. 
• An R&D tax credit of 25% of relevant expenditure can be claimed in full in the year in which the building is first brought into use for the purpose of the trade. 
• The building must qualify for industrial buildings allowances also. 

What is R&D?

While there are many activities carried out by companies that could be considered R&D, identifying and quantifying eligible activities for the purposes of the R&D tax credit can often be quite complex. Revenue guidelines and legislation state that qualifying R&D activities must: 

1. Be systematic, investigative or experimental in nature, 
2. Be carried out within a Revenue approved field of science and technology, 
3. Involve basic research, applied research or experimental development, 
4. Seek to achieve scientific or technological advancement, and v. Involve the resolution of scientific or technological uncertainty. 

What fields of science or technology qualify for the credit?

Allowable fields of science and technology fall into 6 broad categories that are relevant to any industry that employs science and technology to solve the problems they face.  

Industries regularly carrying out R&D can include: 

• Pharmaceutical 
• Medical device 
• Software development 
• Fintech 
• Heavy and light engineering 
• Food and drink production