Leyton Ireland - Leyton welcomes change to R&D Tax Credit but cautions “much more to do”

Jobs Initiative - RDTC changes

11/05/2011

Leyton welcomes change to R&D Tax Credit but cautions “much more to do”

Finance Minister Michael Noonan has confirmed that a change is to be introduced to the R&D Tax Credit scheme that will give flexibility to companies in how they account for the R&D Tax Credit.

Finance Minister Michael Noonan has confirmed that a change is to be introduced to the R&D Tax Credit scheme that will give flexibility to companies in how they account for the R&D tax credit. In particular, the change will give companies the option to take the tax credit above or below the line. Minister Noonan announced the change as part of yesterday’s Jobs Initiative.

Leyton has been calling for such a change for some time now and therefore welcomes the Minister’s announcement. Eoin Brennan, consultant manager at Leyton, states “the confusion that exists around the accounting treatment of the R&D Tax Credit has been a real cause of concern and something that we regularly encounter when speaking with companies carrying out R&D in Ireland. The cost of carrying out R&D is obviously a key component of any investment appraisal and therefore must be minimised. This is particularly relevant for companies that are part of larger, international groups that are competing internally for limited resources. It can have a major influence on that group’s decision to carry out R&D activities in Ireland or elsewhere”.

It is Leyton’s view that the change announced yesterday should be the starting point of a larger revision of the R&D Tax Credit scheme in Ireland. When introduced in 2004, the main purpose of the R&D Tax Credit was to attract foreign direct investment into Ireland and to encourage indigenous Irish companies to engage in more, high-end R&D. There is no doubt that the scheme has succeeded on both fronts. However, in the intervening years, certain limitations of the scheme have also come to the fore. If the R&D Tax Credit scheme is to play the part marked out for it in this country’s economic recovery and growth, these issues need to be urgently addressed.

Probably the most obvious limitation of the scheme in its current form is that the tax credit is calculated on incremental R&D spend as opposed to the volume based approach favoured by most other jurisdictions. What this means is that companies that invested heavily in R&D in past are being penalised because they are not now in a position to increase their level of R&D spend over that “base year” amount. These companies are still carrying out R&D activities in Ireland. In many cases they are maintaining existing and creating new jobs for our young, highly skilled workforce. However they are prevented from availing of the tax credit simply because they had a higher R&D spend in 2003. During yesterday’s speech, Minister Noonan recognised the important roles that the R&D Tax Credit scheme has played in influencing “the decisions of many multinational firms to locate internationally mobile R&D projects in Ireland”. However, it is equally true that if a company is no longer in a position to claim an R&D Tax Credit in Ireland because of its high base year spend, there is a risk that future internationally mobile R&D projects could be located elsewhere.

Given the current state of this country’s economy and our budget deficit, there is unlikely to be much appetite for an outright removal of the base year. If this is the case, then alternative measures need to be considered whereby companies investing in R&D in Ireland, with a long term commitment to the country, can avail of the tax credit. Brennan comments “it should not simply be a choice between removing the base year or not. If this is not possible, it is important that the discussion moves on to the other options open to us. For example, the removal of the base year with a cap on the total R&D Tax Credits available to the company. The cap could be based on the tax contribution of the company (i.e. corporation tax, PAYE etc) over a defined period. All options need to be given careful consideration”.

While the base year issue is also relevant for SME companies, other limitations of the scheme can be more pronounced for these companies. For example, the amount of the R&D Tax Credit that can be received by way of cash refund is restricted to a) the greater of the payroll liabilities of the company in the claim period or b) the company’s total corporation tax liabilities for the previous 10 years. SME companies and in particular start-up companies can often be seriously impacted by this restriction. In addition, the cash refund is received in three instalments over a 33 month period. For cash strapped SME companies this is a very long period to wait to receive the tax benefit for an investment they are required to make now.

As can be seen from the above examples, the challenges faced by companies can vary depending on their size. In addition, the manner in which large companies engage in R&D can be very different to SME companies. For these and other reasons, it is Leyton’s view that any future revision of the scheme needs to include tailored provisions for large and SME companies.

In addition, it is important that future changes to the scheme are not limited to correcting legacy issues such as those outlined above. Instead, much like the activities it seeks to promote, the scheme needs to be inspired, forward looking and positive. Brennan states “a good example would be to enhance the expenditure that can be included in the R&D tax credit claim for new graduate hires. Such a move could enable companies to recruit and create much needed jobs for our highly qualified young people. In addition, if we are taking such individuals off the live register, such an change should satisfy the “revenue neutral” requirement that was central to yesterday’s Jobs Initiative. Indeed it could easily have been announced as part of that initiative”.

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