An assessment of R&D tax credits and their role towards innovation within Irish industry
and | Aug 22, 2020
About this article
Article Category: Research Article
Published Online: Aug 22, 2020
Page range: 34 - 46
DOI: https://doi.org/10.2478/ijm-2010-0003
Keywords
© 2020 James Kennedy et al., published by Sciendo
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
Figure 1
Comparison between 2013–2014 and 2015–2016 BERD CSO findings
| • Enterprises that employ 250 persons or more had the greatest share of R&D expenditure in 2013, with just under 50% of all actual expenditure. | • Enterprises that employ 250 persons or more had the greatest share of R&D expenditure in 2015, with just under 55% of all actual expenditure. |
| • Medium-sized enterprises employing between 50 and 249 persons spent €576m in the same period, which represents more than 28% of total spend. | • Medium-sized enterprises employing between 50 and 249 persons spent €50 m in the same period, which represents more than 23% of total spend. |
| • Small enterprises with fewer than 50 persons engaged spent almost €445m on R&D in 2013, which accounted for 22% of the spend. | • Small enterprises with fewer than 50 persons engaged spent almost €502m on R&D in 2015, which accounted for 22% of the spend. |
| • Over €1.2bn was spent on labour costs, which accounted for 61% of all R&D expenditure. | • Over €1.3bn was spent on labour costs, which accounted for 61% of all R&D expenditure. |
| • Current costs, which include materials, supplies, equipment and overheads associated with R&D, had an associated cost of nearly €636m, which accounted for 31% of total expenditure. | • Current costs, which include materials, supplies, equipment and overheads associated with R&D, had an associated cost of nearly €726m, which accounted for 33% of total expenditure. |
| • The remaining expenditure of €147m was accounted for by capital expenditure, with just over 50% of capital expenditure being spent on instruments and equipment acquired wholly for R&D purposes. | • The remaining expenditure of €157m was accounted for by capital expenditure, with just over 53% of capital expenditure being spent on instruments and equipment acquired wholly for R&D purposes. |
| • R&D spending was highest in the services sector, which accounted for 57% of all expenditure. Spending in this sector was just under €1.2bn in 2013, while the manufacturing sector spent over €864m on R&D. | • R&D spending was highest in the services sector, which accounted for 61% of all expenditure. Spending in this sector was just under €1.4bn in 2015, while the manufacturing sector spent more than €876m on R&D. |
| • 90% of all R&D expenditure was funded by enterprises’ own company/internal funds, while 6% of expenditure was funded from public funds. Small enterprises were more likely to use public funds, with 9% of funding for these enterprises attributed to public funding. | • 88% of all R&D expenditure was funded by enterprises’ own company/internal funds, while 6% of expenditure was funded from public funds. Small enterprises were more likely to use public funds, with 7% of funding for these enterprises attributed to public funding. |
| • There were nearly 2,000 enterprises engaged in R&D activities in Ireland in 2013. More than 74% of all enterprises spent less than €500,000 on R&D activities. Just over one-sixth spent between €500,000 and €2m, while only 10% of enterprises spent €2m or more on R&D activities. | • There were nearly 1,900 enterprises engaged in R&D activities in Ireland in 2015. More than 73% of all enterprises spent less than €500,000 on R&D activities. Just over one-sixth spent between €500,000 and €2m, while only 10% of enterprises spent €2m or more on R&D activities. |
| • In 2013, nearly 1,500 small enterprises were engaged in R&D. They accounted for 73% of all R&D active enterprises compared with 378 medium enterprises, which accounted for 19% of R&D active enterprises and 143 large enterprises, which accounted for 7% of all R&D active enterprises. | • In 2015, nearly 1,300 small enterprises were engaged in R&D. They accounted for 71% of all R&D active enterprises compared with 386 medium enterprises, which accounted for 21% of R&D active enterprises and 166 large enterprises, which accounted for 9% of all R&D active enterprises. |
Collected data with the base year set at 2004
| 2004 | 70.5 | 75 | 1,210 | 1,200 |
| 2009 | 216 | 900 | 1,869 | 1,282 |
| 2010 | 224 | 1172 | 1,834 | - |
| 2011 | 261 | 1409 | 1,757 | 1,600 |
| 2012 | 282 | 1543 | 1,962 | - |
| 2013 | 421 | 1576 | 2,022 | 2,000 |
| 2014 | 553 | 1570 | 2,107 | - |
Industry recommendation to improve the R&D tax credit process
| Quick turnaround on decision from revenue. |
| Credits are paid back over a shorter period of time. |
| Make compliance easier for all companies. We are, by definition, a large company (currently 350 employees). However, by comparison to other players globally, we are small. We need to be mindful of competitiveness, so the cost of compliance should be reduced. |
| Simple structure. |
| Get pre-approval from Revenue on suitability of R&D activities for receiving the tax credit. |
| Simplify application process and speed up approval and payments. |
| Reduce records and admin. |
| More transparency, set guidelines and parameters to operate within and audit accordingly. |
| Simplification of requirements. |
| Streamline the process. Maybe an online portal to bring together all the required information for the application. |
| Need to get cost outlays rebated to cash-starved start-up much faster – State putting in funds through EI, then withholding them through Revenue. |
| Approach differently between SME and MNC. |
| Simplify the documentation. |
| Simpler application and submission of reports. |
| Provide a framework for recording employee-eligible work time. |
| All time spent on new products should qualify for R&D. |
| Clearly specify cost categories that are claimable. |
| Would like to see it more streamlined and simplified, particularly for Irish SMEs. |
| Revenue need to be more supportive. They are too difficult to deal with. |
| 1. Extend the claim period. |
| 2. Further promotion (e.g. through IRDG events). |
| Very clear guidelines of what can and cannot be included (with specific examples). |
| Make it simpler. Revenue have a very narrow view as to what constitutes R&D. |
| A little more flexible. |
| Simplify the claim approach and lessen the burden on companies. |
| Broaden the scope of qualifying work. |
| Increase the rate and make it easier on the internal administration. |
| Better detail around what is considered as R&D. The majority of multinationals in Ireland are doing Redesign and Development and should not be considered for R&D tax credits. This is the reason why multinationals provide large reports to try and justify that the work is R&D. |
| Make it easier to understand. |
| An online application claim, direct to revenue – self-assessment, like the ROS process. |
| Simplify the process. R&D tax credits are being given on activities that companies are going to engage in anyway. Change the incentive to reduce companies’ direct R&D costs at source, such as reduced salary costs to companies (e.g. PRSI, PAYE rebates). That way, the tax credit is seen directly within R&D budgets and not applied outside it, to overall business costs. When the tax credit benefit is seen directly within R&D budgets, then overall R&D activity is more likely to increase. |
| All essential elements of R&D activities to be claimable. Currently, many R&D support activities are deemed ineligible. This creates grey areas and high administration and risk. |
| Streamline administration and get rid of timesheets. The proof required for an innovation should be based on laboratory based-study and incremental innovation |
| Clearer Revenue guidance. |
| Simplify and reduce the workload, especially for small companies. |
| Give very clear guidelines and outline examples case studies, etc. |
| Time to process the credit should be accelerated for start-ups, as the cash flow is critical for small companies. |
R&D tax credit promotion
| Yes (%) | No (%) | |
| Start-up [n=29] | 34 | 31 |
| Small enterprise (<50 employees) [n=34] | 38 | 41 |
| SME foreign owned (50–250 employees) [n=3] | 33 | 33 |
| SME Irish owned (50–250 employees) [n=10] | 50 | 30 |
| Multinational foreign owned [n=19] | 68 | 21 |
| Multinational Irish owned [n=4] | 75 | 0 |
Job creation because of the credit within the organisation
| Not Sure(%) | Yes (%) | No (%) | |
| Total response | 21 | 35 | 44 |
| Sector breakdown | |||
| Start-up [n=29] | 14 | 17 | 69 |
| Small enterprise (<50 employees) [n=34] | 18 | 35 | 47 |
| SME foreign owned (50–250 employees) [n=3] | 33 | 0 | 67 |
| SME Irish owned (50–250 employees) [n=10] | 40 | 50 | 10 |
| Multinational foreign owned [n=19] | 21 | 42 | 37 |
| Multinational Irish owned [n=4] | 25 | 75 | 0 |
Reasons why companies do not avail of the R&D tax credit
| We claim R&D tax credit only for some projects. In reality, we should be able to claim it for more, as the activity we are doing constitutes R&D in the typical meaning, but not necessarily in the legislative definition. Currently, or alternatively, the burden of demonstration on this relative to the cost involved in doing so is great. The system needs to be simpler. We have a good R&D capability. However, the scheme is not really where it needs to be to be a real incentive. Currently, it does not excite engineers, etc. |
| Rule changes and complexity are very onerous on small start-ups. |
| We don’t innovate because there’s a tax credit – we do it because we must. |
| Most companies are aware of the R&D credits ... although a fully compliant tax return is sometimes not that readily available. |
| You have to pay an accountant to claim it. Not user friendly for an SME. It triggered a revenue audit as, Revenue don’t like it. |
| R&D tax credits provide a cash bonus to the business in general and are accounted for outside of the R&D budget. All our R&D investments must make financial sense on their own, and the R&D tax credit is never a factor in decision-making around project selection or the quantum of R&D undertaken. Therefore, the R&D tax credit provides a bonus to companies engaged in innovation but doesn’t provide an incentive to increase the amount of R&D undertaken. |
| Some MNCs have done collaborative projects with us and have taken advantage of the R&D tax credit. It was likely to have been a consideration when the company decided to carry out the research in Ireland. |
| R&D tax credits are only useful for very large organisations that have the labour and financial resources to work on break-through innovation. They are not suited to SME companies that have to work largely on incremental innovation and do not have designated team members on individual projects. |
| R&D tax credit have been critical to R&D in Ireland and to the manufacturing jobs that have resulted from that R&D. |
| Lack of clarity on eligibility, especially in the software development arena. |
| Cumbersome and slow process. |
| Revenue appear to be taking a different stance on R&D, don’t provide good guidelines, and then challenge claims fairly aggressively. |
| The continual re-appraisal of the rules and guidelines by Revenue – what is accepted today may not be accepted tomorrow. |
| There are no significant barriers except the definition of the type and quality of innovation that is to be used, e.g. incremental vs. disruptive innovation. |
| Some people may consider the strict timesheet approach to tracking work undertaken in R&D to be too cumbersome ... especially if the gain is only marginal. |
| The “claw back” – if you inadvertently claim for something you were not entitled to, you have to pay it back promptly, plus interest. |
| The level of work involved to prove the work is in depth research. |
| The cost of processing the claim by accountants. |
| Writing final reports and aligning with other projects. |
| Technical definition of what an innovation is far too high and is based upon laboratory study only; and the administration for the scheme is too much. |
| Better clarity on what exactly is eligible. Accountancy firms try and complicate and cloud this in order to generate fees. |
| Start-ups struggle to get all the processes and software in place to track time spent, in order to claim the tax back. |
| Audits. |
Claiming the credit
| Yes (%) | No (%) | |
| Start-up [n=29] | 7 | 76 |
| Small enterprise (<50 employees) [n=34] | 13 | 66 |
| SME foreign owned (50–250 employees) [n=3] | 33 | 0 |
| SME Irish owned (50–250 employees) [n=10] | 10 | 80 |
| Multinational foreign owned [n=19] | 0 | 72 |
| Multinational Irish owned [n=4] | 0 | 50 |