Monday 21 October 2019

Damien Flanagan: 'Smart Budget changes can make our R&D regime more relevant for SMEs'

In 2016 supports through RDTC dropped down to €448m. Stock photo: Getty Images
In 2016 supports through RDTC dropped down to €448m. Stock photo: Getty Images

Damien Flanagan

The Budget represents an opportunity for the Government to reinforce its commitment to its Innovation 2020 strategy and to encourage more research in Irish SMEs.

While tomorrow's Budget will inevitably have issues such as Brexit and decarbonisation among its key themes, it is also an opportunity to reinvigorate research and development (R&D) activity via some low-cost or no-cost actions.

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The Research and Development Tax Credit (RDTC) is open to Irish-based companies undertaking qualifying research and development activities in Ireland or within the European Economic Area.

Qualifying expenditure generates a 25pc tax credit offset against corporate taxes in addition to the normal tax deduction at the 12.5pc rate. Companies not yet generating profits on which they pay corporation tax can claim the RDTC back in cash (in equal instalments over three years).

In 2016, indirect supports through the RDTC were €670m. A Department of Finance review of the scheme the same year found for every €1 of tax revenue forgone, an additional €2.40 is spent on R&D by companies claiming the RDTC. But in 2017, indirect supports through the RDTC dropped to €448m, a significant decrease.

KPMG's most recent research has revealed a relatively low take-up of the RDTC among Irish SMEs. This year's KPMG Innovation Monitor assessed the views of 100 Irish SMEs in receipt of R&D grant funding from Enterprise Ireland. Just over half (55pc) of those surveyed have also claimed the RDTC since it was introduced. This suggests that the firms involved could have carried out even more R&D activity had they enjoyed the additional benefit of the RDTC in defraying its cost.

The failure of many businesses to apply for the RDTC is most likely the result of a lack of knowledge rather than any scheme weaknesses. Survey responses suggest some confusion around qualification criteria, the application processes, the value, and the rules governing the credit. To address these issues, it would make sense to consider a campaign to promote awareness of the credit with a focus on areas which are poorly understood, ie the rate applicable, the fact that it can be payable in cash, and the rules on what constitutes qualifying expenditure.

The value of the RDTC to smaller companies not yet paying tax would also be enhanced by making it payable over one year, instead of the current three. For smaller firms, three years is a long time to wait. Meanwhile, the accelerated payment would entail no additional cost to the Exchequer, other than the short-term cost of funds in a low interest rate environment.

A further change to consider relates to the restriction of outsourced R&D activity under current rules. Many start-up and smaller businesses do not have the facilities or equipment to carry out scientific and technological research and must outsource it. Allowing more expenditure of that nature to qualify for the tax credit would further stimulate R&D activity with the economic benefits that entails.

We are expecting that the results of the Department of Finance's 2019 review of the R&D tax credit will be published tomorrow as part of Budget 2020. We expect this review will be as positive as the two earlier reviews (2013 and 2016) and hope to see many of the above recommendations implemented as soon as is practical.

Damien Flanagan is a partner with KPMG Ireland

Irish Independent

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