From Basic Research to Market: How R&D Tax Credits Support Irish Companies

R&D tax credits can be a lifeline for Irish companies, encouraging innovation and driving economic growth. These credits incentivise companies to develop new products and technologies, making Ireland appealing to foreign investment. For SMEs, R&D tax credits reduce the cost of innovation, enabling them to grow and further contribute to the domestic economy. These incentives align with EU policies, ensuring Ireland benefits from collaborative research and funding opportunities.

Companies can claim a tax credit of 25% of qualifying R&D expenditures. Employee costs, materials, overheads, software, and the costs of R&D services provided by universities or institutes are all eligible expenditures.

Many think R&D is reserved for cutting-edge technology start-ups or life-saving pharmaceutical companies with huge R&D operations, but R&D can be carried out in any field. Product design and process engineering in manufacturing can result in R&D, as can the development of new packaging or product development in the food industry. Innovation in crop production and construction or waste management and water treatment research are equally valid fields for R&D.

The definition of R&D is intentionally broad to enable as many Irish companies as possible to claim their benefits. However, the burden is on the claimant to ensure that they meet the guidelines, and this includes conducting R&D in one of the three categories.

To make an R&D tax claim to Revenue, you should be able to evidence your qualifying activity in the event of an audit in the form of an R&D aspect query or enquiry. As part of this audit, you should be able to provide details on R&D activity, including but not limited to project names, dates, advances sought, uncertainties overcome and the category of R&D undertaken.

These categories are:

• Basic research
• Applied research
• Experimental development

Companies claiming R&D tax credits must conduct R&D in one or more of these categories to make a valid claim.

R&D tax credits are very lucrative and are only getting more popular. As Revenue handles more claims, audits to ensure qualifying activity may increase in likelihood. A robust claim is essential to accessing and retaining your tax credit.

Basic research means “experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge without a specific practical application”. Basic research can also be known as fundamental or pure research. It is driven by a desire to understand the underlying principles of the world.

This primarily applies to academic and government research institutions, however some companies may still do basic research, particularly those in technology, pharmaceuticals, and advanced materials, also conduct basic research as part of their R&D efforts. This type of research is largely supported by grant funding due to the unknowns associated with theoretical research.

An example of basic research would be studying the behaviour of subatomic particles. A company or institution investigating the properties and interactions of subatomic particles, such as quarks and gluons, to understand the fundamental structure of matter would be conducting basic research.

Though this may be out of reach for most SMEs, basic research might include work done to determine the forces that hold the nucleus of an atom together. This would not be gained with a practical application in mind but it still results in an advance in the field of science. Conducting experiments using particle accelerators, such as the Large Hadron Collider, and analysing data from particle collisions to observe patterns and identify new particles would be qualifying activities.

Basic research like this is essential for advancing science and technology. It provides the foundational knowledge upon which applied research and practical innovations are built.

Applied research means “work undertaken to gain scientific or technical knowledge and directed towards a specific practical application”. Applied research is typically conducted to explore potential uses for basic research results for practical applications.

This kind of research is typically conducted by larger companies with large R&D outfits—think pharmaceutical companies. However, smaller companies may conduct elements of applied research within their projects, especially in the early stages. Applied research could be fully funded by the R&D company or supported by grant funding.

A good example of applied research is the development of a new drug for the treatment of cancer. The design of chemical compounds to inhibit cancer progression and the preclinical and clinical studies to this end would be considered applied research. Conducting laboratory experiments to screen and test potential drug candidates and using computational modelling techniques to optimise the chemical structure of the drug candidate would equally form part of this research.

Applied research like this bridges the gap between theoretical knowledge and practical applications, leading to innovations that address real-world problems.

Experimental Development means “work undertaken which draws on scientific or technical knowledge or practical experience to achieve technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto”.

Most SMEs and even larger companies undertake this type of development. Experimental development can be found in many fields, from manufacturing to software development. It involves the systematic improvement of a product, process or service, building on existing knowledge and largely carried out by experts in the field. Grant funding may support this development, but companies are more likely to incidentally take R&D on as part of their product development strategy.

A company developing the new generation of electric vehicle batteries, seeking to offer higher energy density, faster charging times, and a longer lifespan, could be considered to be carrying out experimental development, as its research and development build on preexisting principles to create a new product.

Work done to experiment with new materials for the battery's electrodes, design and fabricate prototype batteries incorporating the new materials and testing the prototypes to evaluate performance metrics would likely form part of this experimental development. The hallmark of experimental development is iteration, where companies work to refine the design based on test results.

Experimental development takes existing knowledge and technologies and, through rigorous experimentation and refinement, leads to significant advancements and practical solutions in the industry.

Basic research is purely exploratory and has no immediate commercial application. It focuses on understanding fundamental principles without a specific end goal related to commercial products or services. It's driven by curiosity and the desire to expand human knowledge.

Applied research, on the other hand, is directed towards solving specific, practical problems. It utilizes the knowledge gained from basic research to address these issues, aiming for outcomes that have direct applications in the real world, often leading to the development of new products or technologies.

Experimental development involves the practical application of research findings to develop new products or improve existing ones. It includes creating prototypes, conducting trials, and testing to refine and perfect innovations before they are brought to market.

The three categories of R&D can be conducted individually or with some overlap. They can be viewed as three stages of research and development that bridge the gap between theoretical knowledge and commercialisation.

If you’d like further clarification on these categories and how they relate to your company's work, call our team at +353 1 566 2001 or use our contact page.

Our Tax Cloud portal for businesses enables companies to write a full and robust technical report for their R&D tax claim, including all required information like categories of R&D. The experts at Myriad specially developed it to guide you through the R&D tax relief claims process and help you submit a high-quality claim.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud