Small Companies And Start-ups Get R&D Credit Boost Courtesy of Budget 2020

As part of the Budget 2020 offerings, micro and small companies employing a maximum of 250 workers will soon be able to write off up to 30% of their R&D costs, whilst receiving their money far quicker. Crucially, this increase from the current R&D rate of 25% shows an appetite in government to encourage innovation in smaller firms and boost growth both locally and in the wider Irish economy. This is because the change will now enable small companies to gain the full benefit of R&D Tax Credits while they are still in the product development stages and haven’t yet turned a profit. At the moment, smaller firms must wait to use any R&D credit to offset against Corporation Tax liability - a profit point they could well struggle to get to without a decent cash injection up front.

What are R&D Tax Credits and how do they help Irish businesses?

Research and Development (R&D) Tax Credits are offered by the Irish Revenue and act as a financial incentive to encourage businesses to grow. Having launched in the year 2000, the scheme is open to any Irish firm that has undertaken qualifying research and development work in the Ireland Republic or within the European Economic Area. Applicable R&D expenditure can attract a 25% tax credit to be used against corporate taxes over and above a 12.5% tax deduction. In effect, this means that firms undertaking relevant R&D can enjoy a refund from the Revenue of €37.50 for every €100 spent on innovation. In real terms, this reduces the actual expenditure on R&D by as much as 37.5%.

R&D Tax Credits are primarily for offsetting against either the current year’s Corporation Tax liability, or the liability of the year immediately prior. R&D Tax Credit claims must be made a maximum of twelve months from the end of the accounting period during which the R&D costs were incurred.

R&D work can also result in a cash refund. If a business does not have a Corporation Tax bill to pay for the current or immediately prior period, it can receive a repayment in cash across a three-year cycle, in three equal instalments. Alternatively, the tax credit can be used against any tax liabilities in the future. The refund is limited to the larger of the Corporation Tax amounts payable by the business in the ten years preceding, or the payroll liabilities for the period during which the eligible R&D work took place.

What kinds of costs can be included in an R&D Tax Credit claim?

As a general guide, the following costs can be included in your R&D Tax Credit claim:

• Staffing costs - including salaries, employer NICs and pension contributions, cash bonuses, overtime and certain expenses
• Externally Provided Workers (EPWs) - this could be contractors or freelancers directly carrying out a specific part of the R&D work
• Payments made to clinical trial volunteers
• Subcontracted R&D
• Some types of software
• Consumables used up in the R&D process

Additionally, larger companies can include contributions to certain research organisations or individuals where eligible R&D work also took place.

It’s important to note however that any benefits in kind, like company cars or private medical cover for example, are specifically excluded from the staffing costs criteria. Director dividends can also not be included which unfortunately can affect your claim rather substantially if your directors have spent a lot of time working on R&D.

Apportioning time

Some directors or employees may be engaged entirely on R&D projects for the entire time they’re at work. However, it’s much more likely that they’re only partly engaged in R&D and take part in projects alongside their daily duties. In this case, you should determine exactly how much of their time is spent on R&D activities and apportion the costs accordingly when making your tax relief claim. There are a number of different ways you can do this which we would be happy to advise you on.

So what does this change mean?

In essence, this Budget 2020 offering is a positive step forward for smaller and medium sized companies. It means that start-ups and other companies in their infancy would be able to get their hands on the credit rebate more quickly, thus vitally improving their cash flow.

However, the move is still said to leave Irish firms at a disadvantage against competition in the UK, which currently provides a 33% R&D credit for loss-making SMEs (small and medium-sized enterprises). The Irish government has also said it would raise the current 5% relief for R&D work that has been outsourced to 15%, as long as the R&D provider has its base in a third-level institution. This will be of particular benefit to smaller firms that rely on outsourcing to undergo R&D work, whilst also supporting innovative projects in the third level sector - or at least that’s the aim.

Changes to Revenue’s Employment and Investment Incentive (EII) also appears to be geared towards increasing venture capital investment in smaller sized companies, and to encourage investors to commit to a longer-term stake. Currently, investors under the scheme get up to a 30% credit on their investment, although most of the credit is postponed for four years. However, the rules are set to change going forward so that investors can obtain full income tax relief via R&D Tax Credit in the company’s first year. Furthermore, the government is planning to double the benefit cap from the €250,000 limit as it is now to €500,000 for those investors willing to invest in EII for at least ten years.

Tax Cloud can help your business make an effect R&D Tax Credit claim

hether you’re brand new to the world of R&D Tax Credit claims or you’ve been working alongside us for years, we’re here to offer help and advice when you need it.

The team at Myriad Associates is made up of a comprehensive mix of highly skilled R&D professionals, including tax specialists, accountants and advisors. There’s very little we don’t know, having worked with a large number of clients across Ireland as well as the UK.

Why not try the Tax Cloud portal for businesses and accountants today, or give us a call on +353 1 566 2001. Alternatively, you can use our contact page and we’ll call you back.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud