R&D Tax Credits

For accounting periods commencing on or after 1 January 2024, the current R&D tax credit rate is 30% of qualifying expenditure. Where a company has insufficient Corporation Tax against which to claim the R&D tax credit in a given accounting period, the tax credit may be credited against the Corporation Tax for the preceding period, may be carried forward indefinitely or, if the company is a member of a group, allocated to other group members.

Where a company has offset the credit against the Corporation Tax of the current and preceding accounting periods and an excess amount remains, it may claim to have the excess amount paid to it by Revenue.

Companies with research and development (R&D) tax credit claims of more than €50,000 will receive the three refunds over three years on a 50%, 30%, and 20% split. Companies with tax credit claims below €50,000 will get the refunds earlier.

The previous payroll tax restrictions, which applied to the refundable element of the R&D tax credit, have been removed, so the entire R&D tax credit amount is now refundable. The legislation now provides that the company must make a "valid claim" before Revenue can process any refund or offset. The last instalment is paid if any balance remains after reducing the company's corporation tax liability for the following accounting period, no earlier than 24 months after payment of the first instalment.

Many businesses don’t realise that they are undertaking eligible qualifying activities. It is not uncommon for their accountants to forget to tell them about R&D tax credits or even to tell them that they don’t qualify. If your technical lead (the R&D manager, lead engineer, or lead developer) is struggling to overcome the technical challenges of your project – if they are scratching their head wondering how to proceed or losing sleep worrying about the technical uncertainties they face – your project will almost certainly qualify for R&D tax credits. More details can be found in our blog: What Kind Of Irish Companies Can Apply For R&D Tax Credits?

In terms of qualifying tasks, the following activities would be considered eligible for R&D tax credits:

• Defining technical objectives.
• Identifying uncertainties.
• Feasibility studies.
• Reviewing new and competing technologies.
• Analysing, designing and developing the technology.
• Producing technical specifications or other documents to explain and support the R&D project and advancement.
• Testing the product, process or software.
• Planning and managing projects.

In addition, certain indirect support activities may qualify for R&D tax credits, such as:

• Administration, finance, and personnel services specifically required to support R&D activities.
• Training to support R&D.

You can claim relief of 25% on qualifying expenses. For accounting periods commencing on or after 1 January 2024, the rate has increased to 30%.

The main areas of cost that can be claimed are:

• Staff costs (salaries, company pension contributions, employer's Pay-Related Social Insurance [PSRI], bonus payments, and health insurance).
• Agency workers (externally provided workers).
• Plant & machinery costs for R&D.
• Materials used in R&D or prototyping.
• Materials used in R&D or prototyping.
• Subcontractors.
• Work subcontracted to a university or institute of higher education.

It is not uncommon for an R&D team to consist of many individuals from different parts of the business. Your R&D project team may include the R&D Manager, a Lead Developer, Engineers, Project Co-ordinators, CAD Engineers, Quality Control and Testing specialists, and Cost Accountants, as well as members of the senior management team.

A business must submit its R&D tax credit claim within 12 months of the end of the accounting period during which the R&D activities took place. To make a claim, the business must complete the CT1 form through the Revenue Online Service (ROS). More details can be found in our blog: How Far Back Can I Claim R&D Tax Credits In Ireland?

Revenue will not allow a late claim based on insufficient time or being unaware of the R&D tax credits scheme.

When Revenue receives a claim, it follows one of two processes:

• If the R&D credit is used only to offset corporation tax liabilities, it is processed without manual checks.
• Suppose the claim is for a payable credit. In that case, Revenue will carry out certain verification checks, such as ensuring that all returns are up to date, reviewing the computation and checking the previous claim. Where no issue arises, standard processing continues. Revenue performs an intervention (an audit) if an issue is found.

We strongly advise a claim for R&D tax credit be supported by a detailed report outlining the technical advancement and uncertainties and a detailed breakdown of the eligible R&D costs.

Section 766 (qualifying activities) of the CT1 return must be completed within 12 months of the end of the accounting period in which the business incurred the R&D expenditure.

One of the conditions for a company to make an R&D tax credit claim is that the claimant company must carry out the qualifying R&D activity. There are two situations in which relief is available to a company that has not carried out all the qualifying R&D work:

• A company which carries out qualifying R&D activities and pays a university or institute of higher education to carry out qualifying R&D activities can claim credits, limited to 5% of the expenditure incurred by the Company itself on R&D activities or €100,000, whichever is greater
• A company which carries out qualifying R&D activities and pays another person who is not a connected party to carry out qualifying R&D activities for the Company can claim credits, restricted to 15% of the expenditure incurred by the Company itself on R&D activities or €100,000, whichever is greater.

In either case, the Company must incur at least the same expenditure on qualifying activities it carried out, and the subcontracted activity must be eligible as R&D in its own right. The Company must notify the subcontracted party in writing that they may not make an R&D tax credit claim for these activities.

Any expenditure met directly or indirectly by any grant aid or assistance from the state, or any public or local authority of any other agency of the state or another relevant EU or EEA member state will not qualify for R&D tax credits.

This means that if your company has received a relatively small grant, your company could lose money overall, as the grant can significantly reduce what your company can claim in tax relief. You should always seek professional advice when making an R&D tax credit claim.

(See also: R&D Grants)

Common examples of software development projects that may qualify for R&D tax credits include:

• State-of-the-art software for new projects or new functionality for existing R&D projects.
• Tools to extend the functionality of application software programs or an operating system.
• Extensions to database software, programming languages, or operating systems.
• Software development tools, such as tools to port data across platforms, tools for image processing or character recognition.
• Novel data management techniques, such as new object representations and new data structures.
• Innovative methods of capturing, transmitting, manipulating, and protecting data.
• Software to run new computer hardware.
• Software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets, or
• Means of integrating hardware and software platforms.

Common examples of product and process development projects that may qualify for R&D tax relief include:

• Innovative product development using computer-aided design tools
• Development of second-generation or improved products.
• Tooling and equipment fixture design and development.
• Developing unique computer numerical control programs.
• Designing innovative programmable logic controllers.
• Designing innovative manufacturing equipment.
• Prototyping and three-dimensional solid modelling.
• Designing and developing cost-effective and innovative operational processes.
• Integrating new materials to improve product performance and manufacturing processes.
• Evaluating and determining the most efficient flow of material.
• Designing and assessing process alternatives.
• Designing, constructing, and testing product prototypes.
• Developing processes that would meet increasing regulatory requirements; or,
• Streamlining manufacturing processes through automation.

A Revenue intervention of an R&D claim consists of two tests:

• The "science" test ensures that the activities included in the claim meet the statutory definition of R&D activity.
• The "accounting" test ensures that the costs incurred in the qualifying activity have adequately been tracked and accounted for.

Revenue has a panel of experts that it consults with as required when completing the science test.

More details can be found in our blog: What is the Revenue's "Science Test" for R&D tax credit?

Revenue can audit any R&D tax claim made up to four years from the end of the claim's accounting period. Revenue will often ask claimants to provide information about the basis of the claim and may carry out more formal desk and field audits. A claim that is overstated or does not meet the R&D tax credit scheme requirements must either be repaid in part or in full, with interest, and Revenue may also raise a penalty.

Companies making an R&D tax credit claim must maintain contemporaneous and relevant records of the expenditure incurred in the R&D activities. The quality and quantity of the records kept can affect the outcome of an audit. For this reason, many companies choose to work with an R&D consultant as they can handle any enquiries from Revenue on your behalf.