Budget 2012 – Budget impact on R&D Tax Credit Scheme for Irish firms

7 Dec 2011

Finance Minister Michael Noonan, TD, yesterday revealed changes to the Research and Development (R&D) Tax Credit Scheme as part of the 2012 Budget. The changes to the scheme have, in general, received favourable reaction from technology circles, especially in relation to SMEs with R&D portfolios.

The three changes to the R&D Tax credit Scheme are:

  • Volume basis v incremental basis

Noonan yesterday proposed that the first €100,000 of qualifying R&D expenditure will benefit from the 25pc R&D tax credit on a volume basis. This change appears to be particularly targeted at SMEs.

In response to the changes to the R&D Tax Credit Scheme, Michael McGivern, Tax and Technology partner with RSM Farrell Grant Sparks, said this morning that “it’s a good start”.

“The volume basis for claiming credit should be welcomed. However, Minister Noonan should remove the incremental basis and move entirely to a volume basis,” said McGivern. He said the Government needs to take a “bold” move and entirely abolish the incremental basis.

Further evaluating on this tax credit change, consulting firm Leyton said today that this will mean the company’s base year R&D spend will not be taken into account in calculating the R&D tax credit available to the company on this amount.  

“For expenditure on R&D in excess of €100,000, the current incremental basis will continue to apply,” said Leyton.

  • Subcontracting of R&D activities

Outsourcing limits for sub-contracted R&D expenditure is being increased to the greater of 5pc or 10pc as appropriate or €100,000.

RSM Farrell Grant Sparks is envisaging that this will result in a higher level of qualifying expenditure for R&D tax credit purposes within the SME sector.

In reaction to this change, Leyton added that this will allow companies to include the greater of the 10pc/5pc restricted amounts as currently applies and €100,000.

“We assist a lot of SME companies in claiming the R&D tax credit and the raising of the restriction on subcontracting costs to €100,000 will benefit a lot of these companies,” said Leyton today. It said the raising of the restriction on subcontracting costs to €100,000 will “benefit” a lot of these companies.

“However, the restriction on subcontracted R&D costs also impacts large companies and due to the proposed €100,000 restriction, the changes will be of limited benefit to these companies,” the firm added.

  • Use of the credit to reward R&D employees

Under the final change announced yesterday, companies will have the option to use a portion of the R&D Tax Credit to reward key employees who have been involved in the development of R&D.

While Noonan did not disclose much more than that, Leyton believes the intention “would appear to be to facilitate some form of tax-free reward to these employees”.

Other measures relevant to the tech and start-up sectors

Three-year tax relief for start-up companies
Noonan said yesterday the exemption will be extended to new start-up companies for the first three years of trading where such trades commence in 2012, 2013 or 2014.

McGivern said Noonan should take action and be even bolder in the Finance Act 2012.

“Governments throughout the world are aggressively using tax policy to attract R&D activity to their jurisdictions and Ireland must not become complacent in this regard,” he added.

Other measures of relevance to the technology sector

  • No change to the 12.5pc corporation tax rate
  • Special Assignee Relief Programme
  • Foreign Earnings Deduction to support Ireland’s export objectives

RSM Farrell Grant Sparks today said the legislation governing the proposed changes to the R&D tax credits regime, the extension of the three-year start-up, the introduction of a Special Assignee Relief Programme, and the re-introduction of a Foreign Earnings Deduction will be contained in Finance Bill 2012 which we can expect to see early in the new year.

Base year issue

Leyton said it was hopeful these changes would represent the first in a series of steps to be undertaken to address the “base year issue”.

“One of the more contentious aspects of our current incremental based scheme is that many companies are prevented from benefiting from the tax credit despite the fact that they are undertaking qualifying R&D activities and employing highly qualified personnel to do so. If the amount spent on R&D in the claim period does not exceed the company’s R&D spend in 2003, the company is currently unable to benefit under the scheme. With international competition for attracting R&D becoming increasingly intense, the risks of allowing such a situation to continue are obvious,” said a representative from Leyton.

Carmel Doyle was a long-time reporter with Silicon Republic