What is the Research & Development (R&D) tax credit?
The R&D tax credit is a valuable tax-based incentive that aims to encourage companies in Ireland to invest in research and development activities.
You could potentially get a 25% tax credit if your company carries out R&D within the European Economic Area (EEA).
If you qualify for this tax credit, for every €4 of R&D you carry out, your company keeps €1 of Corporation tax due. It’s important to note that this tax credit does not affect the 12.5% Corporation tax deduction.
Speaking to an accountant is the best way to determine if you are eligible to claim this tax credit. If you have formed a Limited Company in Ireland and you carry out qualifying research and development activities (listed below), you can avail of this incentive.
Who qualifies for the R&D tax credit?
A company may qualify for the R&D tax credit if it meets the following conditions:
- The company pays corporation tax in Ireland
- Qualifying R&D activities are carried out by the company (we list qualifying R&D activities below)
- The expenditure on R&D is not being used for a tax deduction in another country
What are the qualifying research and development activities?
Your company must carry out R&D activities that meet particular conditions.
If your company carries out any of the following criteria, you may be eligible to claim this tax credit
Be in the field of science or technology
These sectors can include biotechnology, pharmaceuticals, and medical devices, engineering, energy, and natural resources, food and drink or software and electronics.
Carry out systematic, investigative or experimental activities
This can include basic research, applied research or experimental development.
Seek to achieve scientific or technological advancement
Advancements can include improving the overall knowledge or capability in the field of science or technology. It cannot be a company's own state of knowledge or capability advancement alone.
Resolve scientific or technological uncertainty
There is uncertainty in the field of science and technology when there is no available basis for a specific goal to be achieved. In other words, there is uncertainty to whether or not a certain goal can be reached by using the current level of science or technology available.
How do I claim R&D tax credit?
You claim R&D tax credits within 12 months after the R&D money was spent. For example, if your qualifying R&D activitiy took place on or after 1st January 2020, the credit is calculated for that accounting period. A claim is made through a company’s Corporation tax return which is due by the 31st of October each year.
In general, the relief is available for the current year’s Corporation tax liability, but you may be eligible to claim for the previous year’s Corporation tax liability.
It’s worth noting that tax credits are also available as cash refunds. This is particularly attractive to Startups or SMEs who are not yet making profits. The credit can effectively part-fund the R&D activity, acting as a valuable source of cash-flow for your Startup.
Get a quote for accountancy services
We recommend you speak to an accountant about the R&D tax credit and how much credit you may be entitled to. Your accountant can explain your specific situation to you in more detail and take care of your Corporation tax return.
What does the R&D tax credit claim process involve?
Your accountant should take care of submitting the claim to Revenue. However, they will look for records of the qualifying activity carried out before they can calculate it into your Corporation tax return.
Revenue expects to see the documentation that charts the lifetime of your research project from beginning to end. For this reason, it is important to keep any relevant accounts and records to support your claim. Furthermore, failure to do so may prohibit the process time of your claim.
Revenue uses the following two criteria to establish if you are eligible for this credit:
The science test
Your activities need to be consistently under review with the statutory definition of research and development activities. The statutory definition of qualifying activities is outlined above.
The accounting test
All expenditure on qualifying R&D activities which is being claimed for must be done correctly. One of the great things about having an accountant is that they'll take care of your Corporation tax return and financial statements.
Other supports for research and development activities
Limited Companies in Ireland have great government startup support available. If you are thinking about starting a business in Ireland, we are happy to help you get set up. We can take care of everything from company formation to looking after your Corporation tax return.
We go through some great supports available to you below. These organisations offer a number of direct support mechanisms including employment and training grants. They work closely with Startups to ensure you have the facilities, resources and supports needed to establish and expand your R&D operations.
Enterprise Ireland is a government agency that assists the development of Irish Startups that are exporting, or have the potential to do so. They provide direct R&D support to Startups and also promote industry and higher education institutes collaboration.
They provide a variety of grantsincluding innovation partnerships, R&D fund grants, technical feasibility grants, and innovation vouchers.
Enterprise Ireland innovation voucher
Enteprise Ireland offer innovation vouchers for Startups that are looking for help with research and innovation. This voucher is attractive if you have a product or service that requires expertise outside of your current R&D capacity. The Innovation Voucher scheme is run by Enterprise Ireland and applications are accepted around three/four times a year.
The Innovation Voucher initiative helps develop and build links between Ireland’s public knowledge providers (i.e. higher education institutes, public research bodies) and small businesses. Innovation Vouchers are worth up to €5,000. Ultimately, they can assist your Startup in exploring a business opportunity or problem with a registered knowledge provider.
However, you can only apply for a voucher during one of the open calls. You can find out eligibility, how to apply and more from New Frontiers R&D innovation voucher capability.
Science Foundation Ireland (SCI)
SCI is the national foundation for investment in scientific and engineering research. Investing in academic researchers and research teams. Specifically, teams who are most likely to generate leading-edge technologies, new knowledge and competitive enterprises in the fields of science, technology, math, and engineering. For example, the Science Foundation provides funding to researchers to relocate to Ireland from around the world and to Irish based researchers.
Knowledge Development Box (KDB)
In 2016, the Irish Government introduced the new Irish Knowledge Development Box (KDB) regime. Similarly, the UK has their own development programme, which they refer to as the Patent Box.
KBD enables companies and Startups to carry out research and development activities in Ireland by granting a favorable tax rate of 6.25%.
This regime aims to encourage innovative activity in Ireland. Further, its introduction demonstrates Ireland’s commitment to offering Startups a promising corporation tax rate.
For the purposes of the KDB relief, your Startup or SME’s annual income from Intellectual Property (IP) cannot exceed €7.5 million and group turnover cannot exceed €50 million.
For instance, the KDB relief will be granted only where your qualifying assets are the result of R&D activities. Therefore, claiming the KDB is the next step for you if you’re already claiming the R&D tax credit annually.
What is a qualifying asset?
Revenue state that a qualifying asset is one that is created from R&D activities such as:
- A computer programme
- An invention protected by a qualifying patent
- Also, an IP for small companies which are certified by the Controller of Patents as patentable, but not patented
R&D enables startups to reduce their operating costs and increase their cash flow. Thus, allowing them to recruit targeted hires and increase margins.
Above all, tax incentives are fundamental for nurturing your startup and allowing it to progress.
What do I need to do next?
Firstly, you need to set up an Irish Limtied Company. We can take care of this for you – you can read more about our Company Formation in Ireland here. Only Limited Companies are eligible to claim R&D tax credits so it is worth looking into, if you’re considering starting a business. If you’re unsure about the differences between Sole Traders and Limited Companies, our expert Client Services team are always happy to talk to you.
Once your company is incorporated, your accountant can give you more specific advice on your elgibility for this relief. It’s always useful to have an accountant so they can help you save on your tax liability! If you already set up a Limited Company, get in touch with us so we can send you a quotation for our accounting and compliance service.
You can get in touch through +353 1 905 9364 or email us on firstname.lastname@example.org.
Larissa is a Fellow Chartered Accountant (FCA) and is the CEO of Accountant Online, which specialises in company formation, company secretarial, annual accounting services, bookkeeping, tax, and payroll services for micro and small companies in Ireland, Northern Ireland and the UK.