Fine Gael leading the way on R&D Tax Credit plans

R&D Tax Credits – Change may be on the way

22/02/2011

R&D Tax Credits – Change may be on the way!

Leyton take a look at what the three election parties are proposing in terms of R&D and Innovation for the future...

This Friday, 25^th February, the people of Ireland will vote in a general election that, if polls are accurate, will result in a seismic shift in the political landscape of this country. Support for Fianna Fail has collapsed to levels that heretofore would have been considered unthinkable. It is clear whom the electorate hold responsible for a downturn that has seen the Irish economy, once the poster child of small, open economies, deteriorate to such an extent that it is reliant on external funding for its very survival.

However in amongst the turmoil and the gloom there have been some shining lights. For example, the performance of Irish exports has proven resilient throughout the crisis. Many of the world’s largest and most well known multinational companies have issued clear and positive statements regarding their commitment to retaining their presence in Ireland. Irish companies have proven themselves adept at changing and in some cases reinventing themselves to face the challenges and take advantage of the opportunities that present themselves during an economic downturn. It is critical that the next government identifies, protects and enhances the policies and initiatives that have made these success stories possible. One such policy is the Research and Development (“R&D) Tax Credit.

While improvements to the R&D Tax Credit scheme have been made over the years by Fianna Fail (in 2009, the R&D Tax Credit was increased from 20% to 25%, and a payable cash refund mechanism was introduced), of late there has been a reluctance to make sweeping changes to the scheme that would place Ireland at the forefront for R&D tax relief offerings on the international stage.

This satisfaction with the status quo is borne out In Fianna Fail’s National Recovery Plan and the party’s election manifesto. In both documents the party acknowledges the importance of R&D Tax Credits. However, neither document includes any specific proposals for enhancements to the existing scheme. Unfortunately, with other countries constantly improving their own R&D tax relief offering, failure to keep pace represents a loss of competiveness.

R&D is an intellectually driven pursuit carried out by people. Investment in R&D means investment in jobs. All political parties have highlighted job creation as a top priority issue during their election campaigns. Therefore it is interesting to note that of the three main political parties, only Fine Gael have recognised explicitly the importance of the R&D Tax Credit and the need for enhancements to the existing scheme.

Deirdre Clune TD, Fine Gael Spokesperson on Research and Innovation, recently set out the party’s proposals to enhance the R&D Tax Credit scheme. These include:

Companies with R&D expenditures of under €100,000 will be entitled to full tax credit on those entire expenditures as opposed to just the increment over the base year, with marginal relief for companies with expenditure just over €100,000.
Companies will be able to offset R&D credit against employers’ PRSI as
an alternative to corporation tax.
Companies in receipt of a Research, Technology and Innovation (RTI) grant from one of the development agencies will be automatically deemed as entitled to the R&D tax credit.

While stopping someway short of the changes needed to make Ireland’s R&D scheme market leading, Ms Clune’s proposals are most welcome for two main reasons. Firstly, there is recognition of the need for change. Secondly, Ms Clune’s proposals show an understanding of a number of the key issues facing companies in Ireland as they seek to claim their full entitlement under the existing scheme.

For example, Ms Clunes proposes to remove the base year where spend on R&D is less than €100,000. The intention of the base year when introduced was obvious and not without merit – to encourage companies to increase the level of spend on R&D. However we are now in very different times. Companies that invested heavily in R&D in Ireland in 2003 are now being penalised and in many cases are not entitled to an R&D Tax Credit at all due to reductions in R&D spend in the intervening years. However these companies are still investing in R&D and jobs in this country. The R&D Tax Credit scheme should reward these companies for their continuing commitment and investment. At Leyton, we believe the base year needs to be removed altogether.

Ms Clunes proposal to allow companies to offset the R&D Tax Credit against employers PRSI is one that we at Leyton have been calling for for some time. In many cases this would lead to a more immediate benefit to the claimant company. However even more importantly, it should facilitate companies in taking the R&D tax credit “above the line”. There is still some confusion regarding the correct accounting treatment of the R&D Tax Credit, particularly amongst companies preparing accounts under US GAAP. How the R&D Tax Credit is treated for accounting purposes can have a significant impact on the perceived cost of carrying out R&D activities in Ireland which is obviously one of the main considerations in appraising investment options.

Ms Clunes also proposes to simplify the R&D Tax credit claim process in cases where an RTI Grant has been received. There is no doubt that many companies find the R&D Tax Credit claim process a complicated and time consuming affair. It is important that the claim process is made as straightforward as possible and that companies with limited resources are not prevented from claiming their full entitlement. At Leyton, we believe that a more streamlined claim process needs to be introduced for SME companies.

For Ireland to succeed in becoming the location of choice for R&D companies, further enhancements will need to be made to the R&D Tax Credit scheme. In our Pre-Budget 2011 submission (click here to read) we set out 6 measures that we believe need to be introduced to achieve this. In addition to the changes outlined above, we have called for an increase/removal of the outsourcing cap, the introduction of tax measures to introduce key R&D personnel to this country and the lifting of restriction on the R&D tax credit amounts that can be received by way of a cash refund.

Now that we have experience of the process for claiming cash refunds for the first time, the importance of the latter point is more apparent. Under current rules, the amount of the R&D Tax Credit that can be received by way of cash refund is limited to the greater of a) the company’s payroll liabilities for the year of the claim and b) the company’s total corporation tax liabilities for the previous 10 years. The reality is that the companies being hardest hit by this restriction are the companies most in need of access to funding i.e. SME companies. For example, start-up companies will have little or no corporation tax liabilities and payroll liabilities for the first few years of operation. However the growth potential is often huge. Unfortunately, given the working capital crisis that exists in this country, there is a risk that this potential shall not be realised. For these companies, receiving a cash refund of 25% of their R&D investment could be the critical to their survival.

There is another recommendation that we would make to the incoming Government that will have a significant, positive impact on the take up of the R&D Tax Credit scheme and as a result, the economy. The Government should launch an awareness campaign, highlighting the benefits of the R&D Tax Credit scheme and more importantly, the wide range of companies of all sizes and across all industry sectors that benefit from the scheme. At Leyton, we encounter companies on a weekly basis, particularly SME companies, that have lost out on valuable R&D Tax Credits even though their activities qualify under the relevant tax legislation. The main reason is that they were not aware that they were carrying out R&D activities. The incoming Government should make it their job to ensure that all companies are aware of their entitlement to claim the R&D Tax Credit.

There is only one reference to the R&D Tax Credit in the Labour Party’s election manifesto. They state that the R&D Tax Credit needs to be extended to apply to the gaming industry. Even though Fine Gael also propose this in their manifesto, Labour’s one suggestion shows a lack of understanding of the scheme that is widespread and has resulted in a lower take up of the tax credit than should be the case. The R&D Tax Credit legislation applies to all companies irrespective of their industry sector i.e. all companies must satisfy the same requirements and can potentially avail of the same benefits. As mentioned above, many companies are losing out on valuable R&D Tax Credits because they mistakenly believe the relief does not apply to them. Assuming Fine Gael and Labour will form the next government, perhaps Ms Clunes first roles could be to brief her new colleagues on the workings of the R&D Tax Credit scheme.

ENDS

Eoin Brennan
Consulting Manager
Leyton Ireland

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