Mark O'Sullivan discusses the opportunities arising from the recent review of Ireland's R&D tax credit regime.

The recent review of Ireland’s R&D tax credit regime by the Department of Finance is an opportunity to implement positive change to the scheme and improve its accessibility to SMEs.

Although the Research & Development tax credit regime in Ireland, which offers the potential to reduce the costs of R&D by 25%, has been in place since 2004, amendments to the regime over the past 10 years have been minor. Many believe this lack of development has prevented Ireland’s SMEs from utilising the scheme, as the barriers to entry remain in place.

The slow uptake of the R&D tax credit scheme in Ireland by SMEs is well documented. From my own experience in BDO Ireland, SMEs choose not to avail of the regime due to concerns relating to administration costs and the potential claw back of relief by the Revenue Commissioners, and that attitude is understandable.

Given that SMEs make up more than 99% of the companies in Ireland, it is hoped that the Department of Finance will implement some practical changes, based on the public consultation and review of the R&D tax credit regime which was carried out in April – June.

Almost half of the questions in the 2019 public consultation specifically focused on how the regime can be improved for SMEs, including why there is a low uptake by them and how this may be tackled.

Some of the pro-SME suggestions that have come from the public consultation include the ability to claim the cash refund in full in year-one, as opposed to receiving it over three years; the simplification of the credit calculation; increased certainty as to whether a claim has been accepted rather than a four year review window; and the simplification of documentation requirements.

These changes to the scheme would provide more guarantees for claimants/applicants and encourage more SMEs to apply. 

The regime also needs to be future-proofed to ensure that it remains competitive in comparison to other jurisdictions, particularly the UK in a post-Brexit environment.

There are elements of the UK regime which have proven successful in encouraging SMEs there to undertake innovative activities. SMEs in the UK can attain advanced assurance which provides certainty that their R&D claim for the next three periods will be accepted. No such guarantees exist in Ireland. 

I would encourage the Irish government to work towards emulating some of the successful elements of the UK regime, with a view to providing increased levels of certainty for SMEs claiming the credits in Ireland. The goal here is to accelerate re-investment by the claimant in to their R&D activity, and further drive innovation in the country.

In addition to the Department of Finance review of the regime, updated R&D tax credit guidelines were published by Revenue in March. The purpose of these guidelines is to provide potential claimants with an up-to-date view of Revenue’s interpretation of the legislation pertaining to the regime.

A number of the clarifications detailed were positive, particularly for SMEs. However, one key addition which we have seen cause some confusion in practice is the inclusion of an appendix containing a ‘suggested file layout’. Concerns in relation to this matter were raised by BDO and others at the time of publication.

We have recently seen Revenue officials utilise this ‘suggested file layout’ as a ‘self-assessment questionnaire’ that the claimant has been asked to complete as part of Revenue enquiries or audits.

In the first instance, this appears to present a potential administrative headache for companies who were used to submitting information in a particular format and were now presented with a new template. In practice, however, there is no requirement to complete this questionnaire and it is instead acceptable to provide the supporting information to Revenue in the manner that it has been provided previously.

Given the high level of time and effort that numerous claimants have put in to implementing documentation processes for the purposes of R&D tax credit claims, we now believe that it is important this stated Revenue policy and expectation is clearly understood and followed by Revenue districts reviewing claims.

The recurring themes within the responses to the public consultation from bodies including the American Chamber of Commerce Ireland, Chartered Accountants Ireland, Dublin Chamber, and practice bodies, along with the recurring requests from claimants with respect to what is included in the R&D guidelines, are that SMEs want certainty as to what they can claim, when they can utilise the relief, and how they must support a claim.

I believe that the implementation of some of the proposed changes, coupled with some of the positive updates in the latest R&D guidelines, will further encourage innovation within Irish-based SMEs. We have an opportunity here to solidify Ireland’s R&D tax credit regime as a best-in-class support for innovative companies. It is vital that we take that opportunity.

Mark O’Sullivan, Head of R&D Technical Services at BDO Ireland

Content adapted from "State must grasp the opportunity to open up R&D tax credits to SMEs".

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