The Institute recently issued a response to the public consultation recommendations on the R&D tax credit. You can read the full response here.
Institute recommendations on the R&D tax credit
- A pre-approval process for first-time R&D tax credit claims by small/micro companies should be introduced to bring much needed certainty for taxpayers. While some of these companies, in receipt of IDA/Enterprise Ireland R&D grants, may qualify for Revenue’s simplified validation process for the science test, this does not alleviate the uncertainty over Revenue subsequently challenging the claim on the accounting test.
The UK, for example, allows small companies, claiming R&D relief for the first time to avail of ‘advance assurance’. This means they can apply to HMRC for relief, without the need for HMRC to carry out any further checks on the claim for the first three accounting periods. If a small company satisfies the pre clearance of the science element and provides a standard template document of costs that qualify, it should not have to undergo further checks on the claim in the first two/three years, similar to the approach taken in the UK. Appropriate and adequate resourcing would be essential to ensure the effectiveness of such a process.
- Different business sectors have different challenges with the R&D claims process, which must be recognised and dealt with through sector specific guidance, starting with food production, software and med-tech industries, all of which engage in very different R&D processes. The guidance could address practical issues for each sector, for example, on the apportionment of staff time and costs to R&D activities, given differing industry practices and norms.
Naturally, all guidance should apply on a prospective basis, to provide business with certainty on Revenue’s interpretation of the rules at that point in time.
- SME-friendly guidance, with step-by-step instructions on the claims process and practical case studies, together with tips on how to avoid common errors in claims.
- Condense the 3-year R&D tax credit refund to one year for SMEs. Smaller companies that are carrying out R&D activities tend to be cash constrained and accelerating the refund for these businesses would be very beneficial to them, with only a timing cost for the Exchequer.
- Limits in the R&D tax credit regime for outsourcing, restrict collaboration among Irish businesses and, crucially, between businesses and third-level institutions. No outsourcing restriction is required under the OECD Modified Nexus rules for the Knowledge Development Box (KDB). The outsourcing restrictions in the R&D tax credit regime should be removed or at the very least, the outsourcing limit for universities should be aligned with the limit for third parties (i.e. 15%). This would be in keeping with government policy to foster collaboration between academia and private business.
- Many countries are currently improving or introducing new parts to their R&D incentive regimes. Given the mobility of R&D investment projects, we need to ensure that Ireland’s R&D tax credit remains best in class, if we want to continue to attract additional R&D investment in this country.
We know from feedback from our survey that there is a certain level of anxiety amongst companies over the potential for Revenue to subsequently challenge R&D tax credit claims. While verification of claims by taxpayers are an intrinsic part of a self-assessment system, it is important that Revenue audits and interventions are proportionate and conducted in a timely and efficient manner, in the interest of all parties.
In addition, it is vital that the technical experts tasked with opining on the science element of claims have the experience of the application of science in a business environment. Revenue should explore ways to expand the pool of experts undertaking this work to ensure it adequately reflects this expertise. We should continually review and reinforce both the policy and operational aspects of the R&D regime to ensure that it can remain best in class internationally