R&D tax credit will stimulate software sector

19 May 2005

The new research and development (R&D) tax credit scheme announced last year will assist in stimulating R&D activity in Ireland, the Minister for Trade and Commerce Michael Ahern TD told the annual conference of the Irish Software Association (ISA) this morning.

Minister Ahern said he was aware that software companies and other high-tech industry players face significant challenges as a result of globalisation and increased global competition. “Ireland is at a turning point in its economic development. The reality we must face is that the low-cost model is no longer an option for Ireland. Irish companies must increasingly compete through innovation, increased investment in R&D and through a strong focus on export growth,” he said.

Ahern acknowledged the sustained growth of the software sector in Ireland, which now accounts for exports of more than €14bn annually. Focusing on the indigenous segment of the software sector, Ahern pointed to the number of entrepreneurs starting high value-added, high-export potential companies. Over the past year, he pointed out, Enterprise Ireland has supported more than 470 high-potential start-ups, which today employ 7,500 people and have a cumulative turnover of some €1bn each year.

“These companies, which include a strong contingent of software companies, represent a new breed of globally competitive industry based on knowledge and innovation. For future success, we will need to see substantially increased levels of applied research in Irish firms and we must foster an environment where there exists a close working relationship between companies and third-level institutions,” Ahern recommended.

Ahern said the advent of the R&D tax credit introduced by former Finance Minister Charlie McCreevy is an opportunity not to be missed. “Increased business investment in R&D is essential for sustaining competitiveness and future employment creation in the enterprise base. There can be little doubt that R&D is an activity that should be developed in Ireland, and, in this regard, the new R&D tax credit scheme announced last year will assist in stimulating R&D activity here.

“Incremental R&D expenditure qualifies for a tax credit of 20pc, in addition to the normal deduction for R&D expenditure at the effective corporation tax rate. The credit can be carried forward indefinitely against a company’s Irish corporate tax bill where there are insufficient profits to absorb the credit. This gives a potential tax write off for incremental R&D expenditure of up to 32.5pc.

“The repositioning of the Irish enterprise sector higher up the economic value chain is dependent on stimulating and strengthening business R&D. This tax credit should assist firms to increase their expenditure in R&D. With this in mind, the Department of Enterprise, Trade and Employment has already sanctioned an increase of €20m in R&D expenditure by Enterprise Ireland in 2005. Also, a new cabinet sub-committee on R&D has been established and charged with providing a detailed map towards the achievement of a 2.5pc spend on R&D in line with the Lisbon Agenda,” Ahern said.

Ahern also reminded the indigenous software industry that the Government’s support for the Business Expansion Scheme (BES) and Seed Capital Scheme (SCS) is “unwavering”. He said: “The BES and SCS greatly facilitate small and start up companies in overcoming the difficulties they experience in accessing early stage development capital. Recent reports have found that the BES and SCS schemes are core sources of finance available for early stage business ventures, and that they play an important role in helping new start-up companies bridge the financial gap. The limit a company can raise under these schemes was increased from €750k to €1m.

“The future growth and prosperity of the indigenous business sector is also vitally dependent on its capacity to win sales in export markets. Innovation and clearly differentiated products, services and customer solutions are key factors in winning business in international markets,” Ahern told the industry.

By John Kennedy