R&D tax credits

Companies incurring expenditure on Research and Development (‘R&D’) may be eligible for Ireland’s R&D tax credit.

Finance Act 2023 has increased the existing refundable credit from 25% to 30% for expenditure incurred in accounting periods beginning on or after 1 January 2024. This credit can therefore reduce the cost of carrying out R&D by up to 30% and provide a significant cash flow benefit to companies. This is in addition to any tax deductions for the related costs available when calculating taxable profits.

Some highlights include:

• The tax credit applies to qualifying expenditure on R&D activities. This can also include capital expenditure on the construction or refurbishment of buildings used for R&D activity, and expenditure on plant and machinery used in the R&D process.
• The company making the claim is not required to own any intellectual property resulting from the R&D activity.
• The R&D activity undertaken is not required to be ‘successful’ in order to qualify for the relief.
• It is not required that the claimant carry out all R&D activity themselves – contractors may be utilised, and a limited amount of the work may be subcontracted out (subject to various conditions) and still qualify for the credit.
• The company can transfer some or all of the benefit of the R&D credit to ‘key employees’ (subject to various conditions) which can be a valuable incentive.

Do I qualify for the R&D tax credits?

Companies can claim the credit against expenditure incurred on qualifying activities subject to a number of conditions. In summary:

• The claimant company must be subject to Irish corporation tax.
• The claimant company must be engaged in qualifying R&D activity in Ireland, the EEA, or the United Kingdom – qualifying expenditure incurred outside of Ireland in the EEA/UK will qualify for relief as long as it does not also qualify for a corporation tax deduction in that other jurisdiction.
• The claim must be made within 12 months of the end of the period in which the expenditure arose.
• In relation to a claim the company must satisfy both the science and accounting test (further details below).

Qualifying Activity (the ‘science’ test)

In order for the R&D activities to be considered ‘qualifying’ they must have all of the following characteristics:

• Be systematic, investigative, or experimental activities,
• Be in a field of science or technology, and
• Involve basic or applied research, or experimental development.

In addition, the activities must:

1. Seek to achieve a scientific or technological advancement, and
2. involve the resolution of a scientific or technological uncertainty.

Some activity may neatly fit within the above criteria however it is common for a deeper analysis to be undertaken to delineate between qualifying R&D activity and standard development processes. Given the above ‘scientific’ test which must be passed to qualify for the relief, cooperation and buy-in from both finance and technical functions is essential in making a successful claim.

Interaction with grants

Irish Revenue have expressly stated that they will not require a company to demonstrate they have passed the ‘science test’ where the related R&D project –

• Is approved for an Enterprise Ireland, Horizon 2020, Horizon Europe, or IDA grant in relation to the R&D project, and
• The total R&D tax credit claimed for an accounting period is €50,000 or less, and
• The enterprise employs fewer than 250 employees with annual turnover not exceeding €50m, and/or an annual balance sheet total not exceeding €43m, and
• The field of science or technology to which the project relates is listed in S.I. No. 434/2004.

Documentation requirements (the ‘accounting’ test)

In addition to the ‘science’ test referenced above, a claimant must be able to demonstrate to Irish Revenue that its qualifying expenditure is correctly claimed. This must be evidenced via comprehensive accounting records known as the ‘accounting’ test.

Claiming the tax credit

Claims for the tax credit are made in the corporation tax return (Form CT1) for the accounting period in which the expenditure was incurred. Claims for R&D credit must be made within 12 months of the end of the accounting period in which the spend was incurred. For example, a company with a 12-month accounting period ending on 31 December 2024 must submit a claim for the R&D tax credit by 31 December 2025.

For accounting periods commencing on or after 1 January 2024, the first-year claim threshold has increased to €50,000 (previously €25,000). For companies with a claim in excess of €50,000, the refund is paid in three annual instalments as follows:

• Year 1 – the higher of €50k or 50% of the claim amount
• Year 2 – 3/5ths of the remaining balance
• Year 3 – the remaining balance

The increase of the threshold from €25,000 to €50,000 will provide a significant cash flow benefit to new and existing claimants.

Pre-notification requirements

A pre-notification requirement has been introduced for claims relating to accounting periods commencing on or after 1 January 2024. This notification requirement will apply to companies who have not claimed the R&D tax credit in any of the three previous accounting periods and must include specific information relating to the qualifying R&D activities of the company.

This notification must be made within 90 days prior to making a claim for the R&D tax credit.

Saffery has significant experience advising companies on Ireland’s R&D tax credit and assisting with claims. Please reach out to us if you would like to discuss how we can assist you.