The Research and Development (‘R&D’) Credit Regime stands out as the key area of innovation in the Irish tax system. Since its introduction in 2003, it has been enhanced and improved year on year. A summary of the key changes are outlined in the table on here. This trend continued in Finance Act 2013 with two further enhancements to the scheme. These changes are focused on assisting small and medium enterprises in benefiting from the scheme and also in attracting and retaining top R&D talent in Ireland.

Changes

Finance Act 2012 introduced a welcome amendment to the level of qualifying expenditure for the purposes of the R&D tax credit in the context of small to medium sized enterprises. It increased the amount of R&D expenditure which may qualify for the R&D tax credit without reference to the base year (2003). Effectively, the provision amended the incremental nature of the scheme by removing the first €100,000 per annum of qualifying spend (i.e. companies which incur €100,000 of qualifying R&D spend are guaranteed a tax credit of €25,000 irrespective of their 2003 spend).

Finance Act 2013 confirms that this limit will be increased to €200,000 for accounting periods commencing on or after 1 January 2013. The incremental based scheme can be a disadvantage to companies which had a high spend on R&D in 2003 so this trend towards a ‘volume based’ approach is welcomed by small and large businesses alike.

Key Employees

In 2012, a significant change to the R&D Regime involved the introduction of the concept of a ‘key employee’. A ‘key employee’ is defined as employee who performs 75% or more of their employment duties undertaking R&D. Should this criteria be met, the employing company may surrender excess R&D credits to their ‘key employees’ thereby reducing their effective income tax rate to 23%.

Finance Act 2013 has further enhanced the above provision facilitating a greater number of employees being able to qualify as ‘key employees’. As noted above, in order to qualify for the credit, an employee must spend at least 75% of their time working on R&D. Finance Act 2013 has reduced this threshold to 50% for accounting periods starting on or after 1 January 2013. This is a very positive development and should increase the number of employees eligible to benefit from the R&D Regime.

Department of Finance Review

The Department of Finance also published a separate document which outlines the terms of reference for a review of the R&D Regime.

The document confirms that the cost of the R&D Regime including value of tax credit claimed, administration costs and compliance costs is estimated to have risen from €82m in 2004 to approximately €224m in 2010. Over the same period the number of companies benefiting from the credit has increased from less than 50 to more than 1,200. In light of the costs involved and the fact that the last major review of the scheme was four years ago in 2009, there is a review of the R&D Regime being carried out by the Department of Finance during 2013.

To facilitate this, the Department of Finance invited written submissions from interested parties and the understanding is that such documents are currently under review.

The review proposes to focus on the following areas:

1. Establish the economic rationale for incentivising investment in R&D.
2. To identify the exchequer cost and level of take up of the R&D tax credit.
3. To assess the impacts of the R&D tax credit.
4. To consider whether the design and structure of R&D credit is optimum.
5. International competitiveness of R&D offering.

Recommendations Submitted

Upon review of a number of published submissions made to the Department of Finance by various interested parties, a summary of the recommendations which have been suggested as part of the review are as follows:

• Greater certainty to be provided to businesses in order to address the ongoing uncertainty surrounding the outcome of an audit of R&D claims.
• Updated Revenue Guidance which will address the current level of uncertainty noted above.
• Introduction of an R&D Steering Group to provide Revenue, Advisors and Businesses with an opportunity to discuss the practical interpretation and administration of the law and to resolve areas of uncertainty.
• Review of the current provisions regarding outsourcing and consideration of their appropriateness to the international R&D business model in the current environment.
• A full volume based R&D relief system would remove discrimination between companies established before 2003 and those who came into the market after that date when expenditure exceeds €100,000.
• Availability of group relief in relation to excess R&D tax credits.
• A review of the claim process for the construction of R&D buildings.
• Encourage more scientific development by the people who carry out R&D work.
• Review of written notification requirements introduced in Finance Act 2012 for subcontractors and exclusion of certain subcontractor arrangements.
• Cash refund received in one instalment and restriction based on future liabilities particularly in the cases of new start up companies.
• A review of the minimum income tax effective rate criterion, which disregards PRSI and USC, and has the effect of confining the availability of the relief to higher earners and large companies and which effectively, discriminates against lower paid employees who make a valuable contribution to the R&D process in large and small companies.
• The introduction of a special Income Tax rate of 12.5% to be introduced in respect of R&D companies and available on:
1. Income and bonuses paid to inventors, or
2. Bonuses paid to employees directly involved in the innovation process, and
3. Dividend income paid to shareholders of a company involved in innovation.

Conclusion

In summary, the changes in the Finance Act are illustrative of the positive approach being adopted by the Government in developing the R&D Regime. In light of the more recent changes, particularly the €200,000 qualifying spend, it is expected that a number of companies will benefit significantly.

The amendments to the scheme are clearly focused on assisting smaller technology companies in improving their financial position and providing companies of all sizes with the means of attracting and retaining top R&D talent.

The proposed review of the R&D Regime and invitation by the Department of Finance for input from external parties to carry out a collaborative assessment of the R&D Regime will hopefully result in significant future enhancements which will further promote Ireland as a key location for R&D activities.

Summary of Changes to R&D Regime (Source: Department of Finance; www.finance.gov.ie)

In the November 2012 issue of tax.point Rebecca summarises the key features of the R&D tax credit regime and how companies can qualify for relief under the regime.

Rebecca Greene is a Tax Manager with PricewaterhouseCoopers

Email: rebecca.greene@ie.pwc.com

Tele: 01 7925059