The Department of Finance’s consultation on the R&D Tax Credit saw stakeholders highlight a number of areas in which Ireland's R&D Tax Credit framework can be enhanced, including suggestions around outsourcing, the expansion of definitions and an increase in the rate of the credit. What changes do you suggest should be made in Budget 2027 to strengthen Ireland's standing as a global hub for innovation?
Contributor: Derek Henry, Partner and Head of Tax, BDO
Ireland’s R&D tax credit has been one of the State’s most important tax policy successes. For more than two decades it has helped attract high-value research activity, supported skilled employment and encouraged multinational and indigenous businesses to locate substantive innovation functions in Ireland. In a more competitive post-Pillar Two environment, that matters more than ever.
The recent direction of travel is positive. The credit increased from 25% to 30% and, more recently, to 35%, reinforcing Ireland’s commitment to remaining a leading location for research, development and intellectual property creation. The Department of Finance’s Research and Development Tax Credit and Innovation Compass is also significant. It acknowledges that the credit must continue to evolve and identifies priority areas for further work, including subcontracting, qualifying expenditure, administration, payment timing and a possible innovation support. That is a welcome statement of intent.
Budget 2027 should now convert that intent into targeted reform. The clearest priority is subcontracting. Ireland’s rules are more restrictive than many competitor regimes. In practice, modern R&D is increasingly collaborative, global and specialist-led. The existing caps for subcontracting to third parties and higher education institutions should be broadened, with particular consideration given to removing or substantially increasing the limits for university and institute of higher education collaboration. This would support stronger academia-industry links, deepen STEM capability and encourage more ambitious projects to be undertaken from Ireland.
A carefully designed connected-party subcontracting rule should also be considered. Where an Irish company owns, manages and develops the intellectual property arising from R&D, it should be possible for an appropriate level of related-party subcontracted expenditure to qualify, subject to safeguards such as caps linked to Irish internal R&D spend, geographic limits and clear ownership requirements. This would better reflect how multinational groups structure high-value research while ensuring the economic return remains anchored in Ireland.
Second, the treatment of agency and temporary staff should be put on a legislative footing. Revenue’s current concession is helpful, but legislation would provide greater certainty and better reflect the commercial reality that R&D teams often draw on flexible, specialist talent.
Third, cash flow should be improved for smaller and scaling businesses. The first-year payment threshold has already increased, but further acceleration of payment, or a higher threshold, should be examined for SMEs and smaller projects. For companies undertaking risky, early-stage research, timing can be as important as quantum.
Finally, simplification should remain central. Options such as a practical overhead allowance, clearer guidance on qualifying expenditure and better interaction with preliminary tax obligations would reduce friction without undermining compliance. In parallel, any new innovation incentive should be targeted at areas such as digitalisation and decarbonisation, but must not dilute or complicate the existing R&D credit.
Ireland has a strong platform. Budget 2027 is an opportunity to ensure the R&D tax credit remains not just generous on paper, but practical, certain and internationally competitive in operation.
Content adapted from Finance Dublin Irish Tax Monitor.