Global Investments, Innovations and Incentives

Key measures

The importance of the R&D tax credit as a leading incentive to support ongoing investment in Ireland and as a tool to incentivise new FDI into Ireland has been further highlighted in the budget. The budget has set out an increased R&D tax credit rate of 35% rate and provides for an increase in the first-year payment threshold from €75,000 to €87,500. This provides valuable accelerated cash-flow for companies with claims of less than €175,000. For companies who have staff engaged in intensive R&D, the budget sets out a simplification measure, allowing companies to claim 100% of R&D employee emoluments where 95% + of their time is spent on qualifying R&D. However, it should be noted that in practice, such high levels of R&D activities are often challenged by Revenue and robust support to back up this level of R&D intensity should be retained.  

Minister Donohoe announced the publication of an R&D Compass that will set out the future direction of travel for R&D and innovation supports. This will consider targeted changes to the R&D Tax Credit to better align with industry practices and implied that additional innovation supports will be considered. 

The budget announced the extension of the Digital Games Tax Credit by six years to 31 December 2031. For companies that have previously claimed the tax credit on a qualifying game, there is a new provision that allows post-release content work to be claimed. 

In addition to Digital Games Tax Credit, the Budget set out an enhanced Film Tax Credit rate of 40% for productions with a minimum of €1 million of eligible expenditure on relevant Visual Effects work. This rate will apply on eligible expenditure of up to a maximum of €10 million per production. It should be noted that both the amendment to the Digital Games Tax Credit and Film Tax Credit will be subject EU approval to ensure they meet EU State Aid rules. 

Who will be affected?

• Innovative businesses conducting qualifying R&D will benefit from an increased R&D tax credit rate of 35%.  
• The increase in first year payment threshold to €87,500 will provide accelerated cash-flow for companies with claims of less than €175,000. 
• Companies with staff engaged in intensive R&D activities can potentially claim 100% of those staff time. 
• Film production companies engaged in visual effects work can claim a 40% rate of relief eligible expenditure (up to €10 Million).  
• Companies that claimed Digital Games Tax Credit on a game can now claim costs of Post-Release Content work. 

What now?

No changes to the mechanisms of the R&D tax credit scheme have been announced. To take full advantage of these incentives companies must review their existing claim processes and controls. The importance of having robust review and documentation processes in place is critical. Even as moves are made toward simplification of the scheme, this will ensure that the full and correct extent of R&D expenditure is identified and is fully defensible in the event of any Revenue scrutiny. 

With changes to the Film tax credit and the Digital Games credit announced (subject to EU approval) it is highly recommended to review potentially eligible expenditure and activities to ensure that planned projects can maximise potential benefits. 

Our view

In its public consultation on the R&D tax credit earlier this year, the Department of Finance outlined that “the primary policy objective underpinning the credit is to increase business R&D in Ireland” and that it “forms part of a suite of corporation tax measures that ensures Ireland remains an attractive location for both domestic and inward investment.” In light of the public consultation, and increased global competition for investment, we look forward to the publication of the Research and Development Compass as set out in Minister Donohoe’s speech. In our prebudget submission we set out that the R&D tax credit is vital for fostering innovation, economic growth, and attracting foreign direct investment. However, as the national economy and the overall scheme evolves there is a growing need for the scheme to adapt to changing global market and regulatory conditions. 

With the announcement of the R&D Compass, we welcome the consideration of targeted changes to the R&D Tax Credit to the better alignment of the R&D tax credit with industry practices, specifically in the areas of outsourcing and qualifying expenditure definitions, and the potential for new innovation incentives. We await further details of the R&D Compass and look forward to working closely with the Department to help build the incentives of the future. We are encouraged by the referenced changes to third party expenditure, and hope that this will include amendments to current rules to allow related party expenditure on outsourced R&D to qualify for the R&D tax credit. Recognising that Ireland is in full employment, we recommended a shift in focus from job creation to the creation and development of intellectual property (IP) within companies in Ireland. Thereby underpinning growth in corporation tax returns. Working with industry and practitioners to adapt the R&D tax credit, to the evolving needs of claimants combined with the increased R&D tax credit rate to 35% will help drive R&D investment in Ireland, encourage wider adoption of the scheme and enable Ireland to be a leading location for the creation of IP. The extension of the Digital Games Tax Credit is welcomed, as it provides greater certainty to the industry. However, the budget has failed to address inherent flaws in the scheme that make it difficult to claim. This limits its potential to support the development of a valuable industry in Ireland. Noting that the amendments to the scheme will be put forward for EU approval, we hope that the expansion of the scheme will be accompanied by technical amendments in the Finance Bill that will enable more companies to claim this relief.