R&D tax relief goes far beyond 'blue sky' research - all types of business can benefit
Since the introduction of the Irish Research and Development (R&D) tax credit regime in 2004, companies now invest an extra €1.5bn a year.
This should be no surprise given Ireland's R&D tax regime ranks among the best in class internationally and allows companies to claim a competitive package of benefits for their R&D efforts - fostering the growth of indigenous businesses here in Ireland.
The reliefs provide companies engaged in R&D activities with a range of benefits once they meet qualifying criteria - allowing them to reduce their payroll costs year-on-year, increase cash flow and increase margins on R&D projects. They have also supported global multinational companies to attract R&D investment onshore here.
But many companies are still not availing of these valuable reliefs. One of the most common mistakes companies make is thinking they are not carrying out eligible R&D. R&D incentives don't just apply to pharma or technology companies, they apply to a vast array of sectors, including manufacturing, food and drink, energy and financial services.
Qualifying R&D extends far beyond typical 'blue sky' research activity and can include a broad range of experimental development activities, including large elements of new product and process development, evolution and continuous improvement - something which companies should take heed of so they can assess whether they are eligible to seek a claim from Revenue.
The R&D tax credit was first introduced in 2004 in the Finance Act, and provides for a tax credit/cash refund worth 25pc of a company's R&D activities incurred within the charge to Irish tax. This credit/cash is in addition to any existing deduction for R&D expenditure.
For every €100 spent on qualifying R&D, a company could be entitled to €25 cash back, on top of the 12.5pc corporate tax deduction. Effective tax relief of up to 37.5pc for R&D expenditure falling within the scope of this scheme could be obtained for R&D activities, equating to €37.50 of every €100 spent.
Secondly, Ireland's Knowledge Development Box (KDB) regime acts as a further incentive for companies engaged in R&D activity, allowing them to claim tax relief on profits arising from qualifying IP. For this regime, that can include patents and copyrighted software.
The KDB is the first IP regime that is compliant with new international tax standards, and companies claiming R&D tax credits and creating patents or copyrighted software should also be eligible to avail of this incentive - representing an even greater package of incentives.
Unsurprisingly, in recent years as a result of the introduction of these reliefs, there has been a significant increase in R&D tax credit claims.
Between 2004, when the R&D tax credit was introduced, and 2016, the number of claims increased from less than 50 to more than 1,600 - demonstrating the appetite among companies to avail of these incentives.
However, in line with this surge in claims, Revenue has stepped up its efforts to ensure companies are not misrepresenting their R&D activities and are properly evidenced and justified.
Indeed, once a company has been awarded these reliefs from Revenue, it should not consider itself home and free, as there is a four-year window in which Revenue can audit claims following a return being submitted - and in recent years the volume of audits it has conducted has increased markedly. If during the course of an audit, Revenue discovers an issue in relation to a submission, it can reclaim part or all of the credit/cash previously claimed.
Ian Collins is partner and head of R&D for EY Ireland and spoke at the third annual Research & Innovation Conference last week.