The key measures
Budget 2023 may introduce a measure to provide for a fully payable R&D tax credit where a taxpayer can claim the credit fully as a cash payment.
Other welcome measures that were included in the submissions to the Department of Finance as part of the public consultation process are outlined below. However, there is no solid expectation that changes will be announced in the Budget in relation to the following:
- An increase in the R&D tax credit rate from 25% to 30%.
- The broadening of the expenditure base that qualifies for the R&D tax credit (rent, for example).
- An increase in the cap on the level of R&D subcontractors’ payments that can be claimed.
R&D tax credit changes
Since the R&D tax credit was introduced in 2004, it has been instrumental in attracting high value foreign direct investment (FDI) to Ireland and stimulating the growth of innovative indigenous companies. The credit is a proven competitive instrument that has enabled Ireland to leverage the country’s highly educated and skilled workforce to attract this investment. It is a key part of our economic policy and we need to ensure that the value of the regime is preserved and enhanced.
The international tax landscape is changing with the introduction of the OECD Pillar Two GloBe rules and components of US tax reform already implemented. Both have the potential to impact our R&D tax credit unless adjustments are made to ensure that the regime meets the criteria of these international tax reforms. One of the key adjustments required to meet these reforms is an amendment to our R&D regime to provide for a fully payable credit.
Our R&D tax credit regime currently obliges the taxpayer to offset the credit against the corporation tax liability of the company. Only then can a claim be made for any excess credit to be paid or monetised. This does not meet the requirement of a fully payable credit due to the obligation to use the credit in the first instance to reduce the corporation tax liability of a company.
It is clear from the papers recently released by the Tax Strategy Group (TSG) that they are focused on the impact of international tax developments on the R&D tax credit. The papers outline that the TSG is examining whether policy adjustments should be made to the R&D tax credit to adapt to these new standards to ensure that the credit can continue to meet the policy objective of supporting substantive and innovative R&D activities in Ireland.
As a result, we may see changes announced in the Budget and introduced in the Finance Bill to amend our R&D tax credit regime to provide taxpayers with the option to claim a fully payable credit in cash over a period of time (i.e. three years) rather than having to use the credit to reduce corporation tax. This would certainly help preserve the value of our R&D tax credit regime and meet the requirements of these international developments.
It is unlikely that we will see other changes announced to the R&D tax credit regime in Budget 2023 as the focus is likely to be on amending our R&D regime to provide for a fully payable credit. However, we expect that there will be a focus on other potential changes for the Budget and Finance Bill next year, particularly in relation to the rate of the R&D tax credit. Ireland currently has a 25% R&D tax credit. However, with the expected introduction of the OECD Pillar Two GloBe rules at the end of 2023, the R&D tax credit will become taxable. This will essentially mean that the credit will become taxable at 15%, which is a change in how the credit has been treated for tax purposes (i.e. not taxable under our Irish corporate tax rule). As a result, there is a need to focus on the value of our credit and ensure that it continues to be preserved and enhanced. An increase in the R&D tax credit rate from 25% to 30% would help preserve the value of our regime. This is something the Department may consider for Budget 2024.
Other proposed enhancements to the R&D tax credit regime are outlined below. However, it remains to be seen if these might be considered.
1. Broadening the expenditure base that can qualify for the R&D tax credit
The claimable R&D expenditure base has narrowed over the past number of years. Substantial overhead costs that are necessary for undertaking R&D activities have been viewed as ineligible. Building rent is the most recent example of this narrowing view. This needs to be re-thought to accommodate key expenditure necessary for undertaking R&D.
2. Increasing the cap on the level of R&D subcontractors’ payments that can be claimed
There is currently a cap of 15% of a company’s internal qualifying R&D spend that can qualify for the R&D tax credit. Given that evolving R&D models result in increased collaboration with third parties, and the need for small- and medium-sized entities (SMEs) to collaborate with outsourced parties on R&D, an increase in the rate to 20-25% would be welcome.
We are here to help you
Budget 2023 comes at a key time given the impending international tax changes and their impact on our R&D tax credit regime. We are knowledge leaders in this area, working with our clients on the impacts and requirements of changes to our regime to ensure that the credit is preserved and enhanced.