National review of the R&D tax credit scheme
- An increase in the outsourcing limit from 10% to 15%;
- The intention to phase out the base year, once resources permit, and an interim increase in the volume basis from 200,000 to 300,000;
- A commitment to introduce changes in the Finance Bill in order to address the barriers to take-up of the key employee element of the scheme.
Exact details of the enhancements to the scheme made in Budget 2014 will be published in the forthcoming Finance Bill.
The scheme is very important for our members which are engaged in any form of R&D activity, currently over 1,200 companies use this scheme. Given that it is a key component of Ireland's offering for mobile investment but is also very important for the indigenous sector, Ibec took the lead in collaborating with other industry and professional bodies on putting forward the best case for Irish-based industry.
Ibec also made a detailed submission based on extensive research in order to comprehensively address the review’s terms of reference. This has included a detailed survey of almost 250 firms in March/April 2013, extensive consultations with Ibec members in all sectors of the economy and a review of the R&D offering in competitor jurisdictions. The Department of Finance also commissioned its own survey on the R&D tax credit.
While Ireland’s tax incentives for R&D activity have improved considerably over the past decade, the offerings of our main competitors have also been enhanced. Ireland holds about a mid-table ranking in terms its tax incentives for R&D with many jurisdictions offer a significantly preferential regime for smaller firms, according to the B-Index developed by the OECD. Recent developments in competitor countries in the overall corporate tax area and specifically in relation to the tax treatment of intellectual property (IP) and R&D have the potential to undermine Ireland’s relative competitiveness ranking.
The key findings from the survey of 250 firms on the R&D tax credit (75% of which had used the scheme and 25% had not) are:
- Firms using the scheme regard it very positively and see it as a central reason to locate R&D activity in Ireland;
- Barriers to firms not availing of the scheme include its administrative complexity, a lack of historical supporting documentation, high base year R&D expenditure and poor awareness;
- Only 5% of firms are using the ‘key employee’ element of the scheme;
- While the majority of total firms surveyed responded positively in relation to the overall administration, audit and other scheme procedures, a significant proportion of companies cited difficulties in relation to this issue;
- Preferred improvements to the scheme sought included need for greater certainty (over 40%); outsourcing to third party companies (37%) and agency/contract workers (36%); other changes identified included a simplification of calculation of the credit, a reduction in the audit period and enhancements to ‘key employee’ element.
In terms of economic benefit of the R&D tax credit, there is a substantial increase in R&D spend by firms as a result of using the R&D tax credit. We estimate that participation in the scheme by a firm will increase its R&D spend in a given year by between 70% and 90%. When we aggregate these results across the entire economy we find that the R&D tax credit scheme delivers a net benefit (after the cost of the credit) of between €390 and €585 million. Our findings suggest that participation in the R&D tax credit also has other major additionalities in terms of firms’ behaviour, employment, turnover and R&D spending. These include:
- The R&D tax credit is important to employment growth in Ireland as 62% of firms say the credit is important to their firm creating new jobs, while a further 67% said it was important to the retention of jobs in the country;
- The credit is important to future investment in Ireland, particularly in terms of FDI. Almost 70% of firms state the credit is important in their decision to invest in R&D in Ireland, while 65% said it is important to overall investment in Ireland;
- Participation in the scheme has led to improvement of R&D process in firms. Almost two-thirds of firms saw an improvement in how they planned R&D activities, 70% improved on the recording of their activities, while 69% improved in how they retained their R&D related documentation;
- These improvements are important as they may lead not only to greater returns to R&D in the future but also to a better R&D environment developing in Ireland. A stronger R&D environment is crucial to winning future FDI and mobile R&D investment projects.
Recommendations for changes to the scheme:
- Introduce measures to remove uncertainty - the current uncertainty surrounding the retention of the credit benefit under audit is damaging the reputation of the scheme. The issue can be addressed by establishing a structured process of stakeholder engagement to achieve clarity on areas of uncertainty; setting up a streamlined technical appeals process; ensure greater consistency on Revenue’s R&D definition is consistent with the wider national innovation policy; reduce the current audit period of four years’ and Revenue should establish a central specialist unit of scheme experts to provide consistent rulings and guidance to industry;
- Facilitate greater use of agency/contract staff - the use of on-site agency / contract staff should not be subject to the current outsourcing cap and all such expenditure should be eligible for the credit;
- Introduce an innovative solution for the base year problem - the retention of the arbitrary base year remains a barrier to R&D activity and disadvantages some companies competing internationally for mobile projects. Flexibility is required in the base year application through either allowing companies the flexibility to choose their base period from a number of years i.e. 2003 to 2005 or to use their average annual R&D spend over the 2003 to 2005 period; or allowing companies to reduce their eligible base year spend by a certain percentage and offsetting the cost to the Exchequer by reducing the value of credit by a corresponding percentage i.e. a firm with a high base year spend might opt to reduce it by 50% and accept a credit value of 12.5% rather 25%;
- Launch a ‘credit lite’ model for SMEs - despite good progress in recent years, many SMEs are not engaging with the credit due to its complexity and administrative requirements. Thus a streamlined or ‘credit lite’ model should be developed for SMEs which would include the use of pro-forma templates for R&D project management, recording R&D activity and calculation of eligible costs and revenue benefit associated with the credit. Simple on-line calculators demonstrating the benefit and eligibility rules of the credit would be a useful resource for SMEs and would also greatly improve awareness and promotion of the scheme;
- Improve the ‘key employee’ element - this aspect of the scheme is currently not fit for purpose and could be enhanced by reducing the audit period for the scheme so that remuneration awarded to staff would not be subject to an audit claw-back for a four year period; allowing firms to allocate the credit in a tax efficient manner on a team based approach rather than just to ‘key employees’; and introducing a lower R&D time activity threshold for SMEs – the current 50% requirement remains too high for smaller firms.
- IBEC Submission R&D tax credit review - Final.pdf - 1,331 Kbytes
- Department of Finance Review of R&D Tax Credit 2013.pdf - 2,815 Kbytes
- Crowe Horwath report R&D tax credit survey to DoF secure.pdf - 3,303 Kbytes
Wednesday, 16 October 2013