What is the Research and Development (R&D) tax credit?

Ireland’s R&D tax credit system is a major benefit to both multinational companies and SMEs operating in Ireland.  The R&D tax credit was first introduced in the Finance Act 2004 and offers a company undertaking R&D in Ireland a significant tax break, representing a potential 25% refund of costs incurred.

In essence, it means companies incurring qualifying R&D spend can potentially claim a refund of €25 for every €100 of expenditure on R&D.

Profit making companies will see a direct reduction in their tax liability, while loss making companies can claim the credit in three instalments.  Either way, it brings a cash benefit.

The best way to demonstrate this is through the following case:

Software Company Limited incurs €4 million of eligible R&D expenditure in the year ended 31st December 2015.  This will result in a R&D tax credit of (€4 million x 25%) €1 million.

The R&D tax credit can be claimed in addition to the 12.5% corporation tax deduction for any qualifying expenditure. 

Therefore, the total tax benefit is 37.5% i.e. 12.5% standard corporation tax rate plus 25% R&D Tax credit.

The R&D tax credit is part of a suite of tax reliefs aimed at increasing Ireland’s attractiveness as a location to house innovative activities.

How can the R&D credit be used?

Firstly, it can be used to offset the company’s current year corporation tax liability.  Where the credit exceeds the corporation tax liability for the year, the excess can be carried forward indefinitely to offset against future corporation tax liabilities.

Alternatively, the company can make a claim for the excess to be carried back or offset against the preceding period’s corporation tax liability.

Broadly, the only restriction in obtaining a cash refund is that the R&D credit refund cannot exceed the PAYE/PRSI remitted by the company to Revenue in the last two years or the corporation tax liability for the prior ten years if higher.

It can alternatively be used as a key employee reward mechanism to remunerate R&D staff effectively, tax free subject to certain conditions.  The effective income tax rate for such key employees may be reduced to a minimum of 23%, provided certain conditions are met by the company and the individual.

Small Business Assistance SchemeThese employees have to perform 50% of their activities on specific R&D.  They cannot be directors of the company nor have a material interest (being 5%) in the company.  All R&D tax credit claims must be submitted no later than 12 months after the end of the accounting period in which the expenditure was incurred.

What is qualifying R&D activity?

In order to qualify for the R&D tax credit, the activities undertaken by the company must meet the criteria set out under Irish tax legislation.

The R&D activity must be:

  • Systematic, investigative or experimental activity.

  • In a field of science or technology.

  • Either basic research, applied research or experimental development.

  • Involving the resolution of a scientific or technological uncertainty and seek to achieve a scientific or technological advancement.