Many businesses assume that if a cost keeps the lights on while their team does R&D, it belongs in the claim. That's not quite how Revenue sees it. Overhead costs can qualify for Ireland's R&D tax credit, but only a narrow slice of them, and getting the distinction wrong is one of the more common reasons a claim gets pulled up during a Revenue review.
This post explains which overheads qualify, which don't, and how to apportion the ones that do.
What counts as an overhead cost?
Overheads are the background costs of running a business rather than the direct costs of doing R&D itself: rent, utilities, insurance, telephone lines, and similar running expenses. Most companies incur these costs regardless of whether they're carrying out R&D, which is exactly why Revenue treats them so cautiously.
Revenue restricts qualifying expenditure to costs incurred wholly and exclusively "in the carrying on" of R&D activities. That phrase is narrower than "for the purposes of" or "in connection with" R&D, wording used elsewhere in tax law. A cost that supports your R&D indirectly, or that would exist anyway even if the R&D project didn't, generally falls outside the credit.
Which overheads don't qualify?
Revenue's guidance is explicit that indirect overheads don't qualify as relevant expenditure, even where they're connected to your R&D work. This includes recruitment fees, insurance, travel, equipment repairs and maintenance, shipping, business entertainment, telephone, bank charges, and interest.
The same logic applies to overheads associated with employing R&D staff, such as HR costs, payroll team costs, and canteen costs. These are incurred because you employ people who do R&D, but they're not incurred in carrying on the R&D activity itself, so they stay out of the claim.
Which overheads do qualify?
The test is whether the overhead is incurred wholly and exclusively, directly, in carrying on the R&D activity. Revenue's own example is power consumed in the R&D process: if a piece of equipment draws electricity while running an experiment or test, that consumption is part of doing the R&D, not just supporting it from a distance.
In practice, this tends to cover utilities like heat, power, and water where they're directly tied to R&D activity taking place, rather than general office overheads that happen to sit in the same building.
Usually, companies will apportion for these costs to be able to include them. But the method for apportioning needs to be reasonable and defensible.
How do you apportion qualifying overheads?
Very few overhead costs relate exclusively to R&D. A single premises will house R&D and non-R&D work side by side, so you need to apportion the qualifying share.
There's no single prescribed method. Revenue's requirement is that any apportionment is done on a "just and reasonable" basis: a method you can explain, apply consistently, and back up with evidence if asked.
The most common approach is to use the same ratio applied to staff time, taking the proportion of staff time spent on R&D versus non-R&D and applying that percentage to shared overhead costs like heat and power. For example, a company's R&D staff account for 40% of total staff time across the business. It applies that 40% to its annual electricity bill of €50,000, resulting in a qualifying overhead claim of €20,000.
However, this might not be appropriate for all companies and their R&D activities. For example, a company whose R&D requires machinery to be running all the time versus the 9-5 hours of the office space may have higher R&D power costs. Though the power bill covers the whole premises, the lion’s share is taken by the R&D activity, even if the R&D staff make up a minority of the total staff. In this case, some maths to calculate the estimated running hours of the R&D machinery and its power requirements may be more appropriate.
Rental costs sit in a related but distinct category. Rent on a specialised laboratory or clean room that's integral to the R&D itself can be treated differently to general office rent, because the question becomes whether the R&D could have been carried out at all without that specific space.
Why is this an area Revenue focuses on?
Overhead apportionment is often checked in a Revenue compliance review, because it's also one of the easiest categories to overstate. Claiming rent, insurance, or general utilities in full, without a clear R&D-specific link, is a common error. So is including HR or payroll overheads on the basis that they support R&D staff; Revenue draws a firm line between costs incurred in connection with R&D and costs incurred in carrying it on.
Keep a record of how you arrived at any apportionment percentage, along with whatever supports it, whether that's staff timesheets, utility meter readings, or floor space calculations. If Revenue asks, being able to show your working matters as much as the figure itself.
Is this likely to change?
Overhead costs are one of the areas currently under review as part of the Department of Finance's medium-term plan for the R&D tax credit. Stakeholders have asked for a published list of qualifying overhead costs, similar to the existing list of non-qualifying ones, though this has been ruled out as impractical for now. A more concrete idea under investigation is allowing a fixed percentage of wage costs to be treated as overheads automatically, similar to the approach used in some grant applications. Nothing has changed yet, but it's worth keeping an eye on if overheads make up a meaningful part of your claim.
Key takeaways
- Only direct, exclusive R&D overheads qualify. Costs like power consumed during an R&D process can be included; general overheads like insurance, travel, telephone, and bank charges cannot.
- Employment-related overheads don't qualify, even when they support R&D staff. HR, payroll, and canteen costs are incurred in connection with R&D, not in carrying it on.
- Apportionment must be just and reasonable. The staff-time ratio is the most common method for splitting overheads like heat and power, but any consistent, evidenced method is acceptable.
- Specialised space is treated differently to general rent. A lab or clean room integral to the R&D itself can be included, unlike standard office rent.
- Records matter. Be ready to show how you calculated your apportionment percentage, not just what the final figure was.
Overhead costs are a small part of most R&D claims, but they're scrutinised disproportionately to their size. If you'd like help working out which of your overheads qualify and how to apportion them properly, get in touch and we'll talk you through it.
