If your company is doing innovative work in Ireland, there's a good chance some of it qualifies for R&D tax credits. The scheme offers a credit of up to 35% on qualifying expenditure, on top of the standard 12.5% corporation tax deduction. That's a meaningful return, but only on costs that genuinely qualify.
With compliance a hot button issue across the R&D tax incentive, it’s more important than ever to make sure your claim is as robust as possible.
What counts as R&D in the first place?
To qualify for the credit, a project needs to satisfy two conditions: it must seek scientific or technological advancement, and it must involve genuine scientific or technological uncertainty.
Scientific or technological advancement is when your company is developing a product, service, material or process which is an improvement of the state of the art. If you are extending the knowledge or capabilities of the field, you are likely to qualify!
Example A: A software company is seeking to develop a new algorithm that can handle large amounts of data in real time. They are looking to improve upon the existing speed of data handling by tripling the amount of data that can be handled in real time.
Example B: An engineering firm is seeking to develop a new piece of equipment in the manufacturing field that is more sustainable than its predecessor. They are looking to reduce the energy the machine requires to manufacture products by half.
Scientific or technological uncertainty means that it isn’t obvious to your team of experts if it’s physically possible to resolve a problem. Your team should’ve investigated the standard solutions and established that there is no obvious answer in the public domain.
Example A: The software company above cannot easily triple the data handling speed due to the constraints of the database and resources in the on-premises services it uses. It needs to find a novel way of handling the data through trial and error.
Example B: The engineering firm above cannot find an obvious solution in its literature review that can deliver the same output with less energy, due to the heavy loads of the machinery. It needs to develop new machinery based on lean principles.
R&D must be scientific or technological in nature and well documented. Revenue can open an audit at any point, and your records are your primary defence.
Which projects won't qualify?
The R&D credit can only be claimed on expenditure incurred “wholly and exclusively” in the “carrying on” of qualifying R&D activities. This means that the only costs you can claim are those that are directly relevant to achieving the advance of the project.
Since Revenue’s guidelines are deliberately loose, it’s sometimes easier to check if you can’t claim for a specific project or cost, rather than if you can!
Projects won’t be covered by the R&D tax credit scheme if they are in the following fields:
- Social Sciences (economics, business management, behavioural sciences)
- Arts
- Humanities
Additionally, R&D is unlikely (but not impossible!) to be found in the accommodation, catering, and wholesale industries.
Ineligible R&D activities
Even where your project is in a qualifying field, not all activities within it will count.
Activities Revenue excludes:
There are some specific activities and costs in your eligible project that still won’t be eligible; you must always be careful to separate out any activities that aren’t pure R&D. Revenue specifically excludes:
- Early-stage market research, market testing, market development, and consumer surveys
- Operational research (such as efficiency surveys or management studies), unless conducted exclusively for the R&D project
- Routine testing and quality or quantity control
- Cosmetic or aesthetic modifications
- General support services not exclusively done for the R&D project (transportation, storage, cleaning, repair, maintenance, security)
- Facility management costs, unless the facility is integral to the R&D and the work couldn't happen without it
- Fixing commercial production breakdowns, unless they give rise to a new scientific or technological uncertainty
- Legal or administrative work relating to patent applications, sales, licences, records, or litigation
- Commercial and marketing activity
The same applies at the level of individual cost lines. Recruitment fees, insurance, travel, equipment repairs, shipping, phone bills, bank charges, and interest are all ineligible, even where the staff or project they support is doing genuine R&D.
Rent is also not eligible for R&D tax credits in most scenarios. It can only be claimed if the space is a specialised facility that is essential to the research, like a laboratory or a clean room. A general office used by the R&D team doesn't qualify.
Lastly, companies cannot claim R&D tax credits for prospecting, exploring or drilling for, or producing, minerals, petroleum or natural gas.
Staff overhead costs
Staff costs are typically the largest component of an R&D claim. You can claim a proportion of each qualifying employee's emoluments (salary, pension, bonus, and health insurance) based on the time they spend on qualifying R&D.
But certain overhead costs associated with employment don't qualify, even where those employees are doing genuine R&D work:
- HR department costs
- Payroll processing costs
- Canteen or staff facility costs
- Recruitment fees
These are incurred "in connection with" the R&D, not "in the carrying on" of it. That distinction matters to Revenue.
Agency staff are not on your payroll, so their costs are treated as subcontracting and are subject to the limits that apply there.
Subcontracted R&D: the caps that apply
Even where subcontracted work is geographically eligible, there's a limit on how much of it can be included in your claim. Revenue applies separate caps to two categories of outsourced R&D.
Payments to third-party contractors are capped at the greater of 15% of your own in-house qualifying R&D expenditure for the same period, or €100,000.
Payments to universities and institutes of higher education are subject to the same cap, calculated separately.
That means a company engaging both a third-party contractor and a university in the same period can claim up to 15% of in-house spend for each; the two limits don't share a pool.
One condition applies to both: you must be incurring at least the same amount of your own qualifying R&D expenditure in the same period. You can't outsource an entire R&D programme and claim the credits on those payments alone.
There's also a connected persons rule. You can't include subcontracting costs where the contractor is a connected person, meaning a company you control or that controls you.
For a full breakdown of how subcontracting rules work, see Claiming R&D Tax Credits for Subcontracted Work.
Work carried out outside Ireland, the EEA, and the UK
One restriction that catches companies out more often than it should: qualifying R&D activities must be carried out in Ireland, within the European Economic Area, or in the UK. Work performed outside these territories doesn't qualify, regardless of who pays for it.
This applies to your own staff working abroad, to subcontractors, and to agency workers. If you're outsourcing development to teams based outside the qualifying zones, those costs can't be included in your claim.
It's worth doing the maths here. Developers in qualifying EEA jurisdictions may cost more upfront, but 35% of that expenditure comes back through the credit. That can close the gap more than you'd expect.
Capitalised intangible assets
Some capitalised costs — buildings and plant and machinery — can qualify for the credit where they meet specific criteria. Intangible assets are an exception. There is no provision in the legislation for intangible assets, such as internally developed software or IP, to be included in an R&D tax credit claim. Your accounting treatment doesn't change this; Revenue assesses eligibility based on the nature of the expenditure, not how it sits on your balance sheet.
Grant-funded expenditure
If part of your R&D project has been funded by a State grant, Enterprise Ireland, the IDA, Horizon Europe, or a similar body, that portion of the expenditure must be deducted from qualifying costs before the credit is calculated. You can't claim the R&D tax credit on expenditure that has already been subsidised by public funding.
Where does R&D end?
As you can only claim for work done in the “carrying on” of R&D, there must be clear boundaries for when R&D begins and ends.
R&D begins when a scientific or technological uncertainty is identified. This follows the period of investigation into the existing baseline of science and technology (i.e., after literature reviews, competitor analysis and research into the public domain). It is definitely after the commercial project has been given the green light and usually after the general project set up.
R&D ends when the scientific or technological uncertainty has been resolved. It may not be commercially perfect, with some bug fixes, aesthetic alterations or even whole additional modules to be completed, but the underlying feasibility has been proven.
In some cases, the team may be working on multiple R&D projects within a larger commercial project, with their own uncertainties and advancements. The company should identify each R&D project’s start and end dates and separate out costs per project.
Sometimes, following the end of an R&D project and in the course of further “standard” development, or even commercialisation, another uncertainty will arise. This project will have its own start and end dates.
Furthermore, where projects are abandoned, the end of the project will be at the decision to no longer work on the uncertainty.
Key takeaways
- Excluded fields. Social sciences, the arts, and the humanities are out entirely, regardless of project type.
- The "wholly and exclusively" test is strict. Costs must be directly incurred in carrying on qualifying R&D, not merely related to it. Some costs don't pass this test.
- Geography matters. Qualifying R&D activities must be carried out in Ireland, the EEA, or the UK. Work done outside these territories can't be claimed, including subcontracted work.
- Grants reduce your qualifying expenditure. Costs subsidised by State or EU funding must be deducted before the credit is applied.
- R&D has boundaries. R&D begins when a genuine uncertainty is identified and ends when it's resolved. Post-feasibility development doesn't qualify, even if technical work continues.
How Tax Cloud can help
Our online portal guides you through your R&D tax credit claim from start to finish. Our team reviews every project and cost submission to ensure only eligible expenditure is included, and that your claim is robust enough to withstand Revenue scrutiny.
Tax Cloud comes with checks and balances built in, so you never risk making a dodgy claim. Use our timesheets function to make sure you’re accurately claiming your staff time across projects, without going over your project dates. Our cost and tax experts will review your costs so that only eligible expenditure is included.
Use our R&D tax calculator to get an early estimate of what your claim could be worth, or get in touch and we'll walk you through what qualifies.
