In this week’s article we analysis the Research & Development (“R&D”) tax credit regime and the impact this valuable relief can have on Irish SMEs. R&D credits can provide great cash flow benefit to companies in the SME sector and encourage investment in the employment of highly skilled specialists. The R&D tax credit results in a potential €37.50 tax shelter for every €100 of qualifying R&D spend. This is calculated by combining the 12.5% corporation tax deduction to the 25% R&D tax credit available on qualifying spend.
However, not all companies are aware of this valuable relief and many do not consider themselves to be carrying out sufficient scientific advancements in order to qualify for relief. It is important to understand the level of research and development work which can qualify for relief and to dispel the notion of this relief only applying to scientists or “men in white coats”.
At Baker Tilly we can assist clients in understanding both the scientific and accounting test which need to be passed to ensure a qualifying R&D claim can be submitted.
A consultation process was held in June 2019 and a review of the R&D tax credit is currently ongoing ahead of Budget 2020. Below are some of the features of the relief the Department of Finance might consider in light of their review.
The key factors leading to the low take up of the R&D credit by SMEs are the burden on resources to both collate the information and examine the costs in line with Revenue guidance and also the risk of Revenue inspection when a claim is processed. It is also worth noting that some R&D projects can take significant periods of time from beginning to end and as a business must claim the R&D relief within the first 12 months of incurring the expenditure, this timeline can have a negative impact on finalising a claim.
Revenue went some way to acknowledging the need to decrease the compliance burden on SMEs in early 2017 when Revenue eBrief No.17/77 stated the science test would not be challenged on R&D tax credit claims of less than €50,000 where the project was approved by Enterprise Ireland, Horizon 2020 or IDA. This was a positive move by Revenue and made practical sense as any SME receiving grants from these bodies may have already committed significant time to demonstrating the scientific advancement of their project. Some suggestions within the consultation which would be useful to SMEs would be to increase this €50,000 threshold to €100,000 and also allow pre-approval of R&D of the science test within claims by Revenue to provide certainty to SMEs before advancing with a claim. We would support this reduction of compliance burden for companies on claims which have already satisfied R&D thresholds for other State bodies.
In a year where a company does not have a corporation tax charge to utilise the credit against, the credit will be repaid by Revenue over 3 years. This has significant cash flow advantages for start up companies, in particular those who are yet to become revenue generating and hence do not have a corporation tax liability. However, a full reimbursement of this cash refund in year 1 rather than over 3 years should have significant impact on cash flow of SMEs and could see these funds being reintroduced as further R&D spend. This a suggestion we would hope the Department of Finance take on board during their review.
At present, there are also restrictions on the level of credit a company can obtain for subcontracted R&D expenditure. This restriction is the higher of 15% of total R&D spend or €100,000. An increase to these restrictions could be beneficial to companies that do not have particular expertise in house. This is another potential improvement that could be made to the R&D regime within the upcoming Budget.
Ireland has continued to stand firm by its competitive 12.5% corporation tax rate; however, the R&D tax credit regime is one of the key additional incentives for SMEs to further improve the effective tax rate and create employment. We would hope that the consultation and review of the R&D credit regime will lead to some of the above amendments being adopted in Budget 2020. Improvements to the relief could have a significant positive impact on Irish SMEs and start-up companies.
Next week we will focus on some of the employee incentives for SMEs which are currently within our tax legislation.