Positive changes to R&D Tax Credit scheme reaffirm commitment to Innovation

Dec. 7, 2011 - PRLog -- Yesterday, Tuesday 6th December, the Minister for Finance, Michael Noonan announced a number of changes to the Research and Development (“R&D”) Tax Credit scheme as part of the 2012 Budget.  Leyton (http://www.leyton.com/ie) welcomes the fact that the significant contribution the R&D Tax Credit scheme has made to this country’s economy and the part it will continue to play in its recovery has once again been recognised. In addition, the changes announced yesterday, targeted as they were towards the SME sector, would appear to represent the initial, tentative steps towards the development of SME specific scheme, something we have been calling for at Leyton for some time.  

It is our view that much wider changes are required to the scheme if this country is to remain competitive in attracting investment in R&D. However as a signal of this governments continued commitment to making Ireland the innovation hub of the 21st Century, the changes are to be commended.

The three changes to the R&D Tax Credit scheme are discussed in more detail below.

1.   Limited volume based scheme
Under the changes announced today, the first €100,000 of qualifying R&D expenditure will benefit from the R&D Tax Credit on the volume basis. That is, 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.

At Leyton we are hopeful that this change represents 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.

SME companies will be the main beneficiaries under the proposed changes and as the source of much of the innovation being undertaken in this country, this is to be welcomed. However, given the €100,000 limit, the benefit to many of these companies and much larger companies will be limited. At Leyton it is our view that all companies undertaking R&D in Ireland should be able to benefit under the scheme and companies with a history of significant investment in R&D should not be penalised.

2.   Subcontracting of R&D Activities
Under the current scheme, where a company pays a sum to an unconnected third party or a university for the carrying out of R&D activities, the related costs can be included in the company’s R&D Tax Credit claim subject to certain restrictions. In the case of unconnected third parties, the restriction is 10% of the company’s in-house R&D spend. The limit is 5% of in-house R&D spend for payment s to universities.

The changes announced by Mr Noonan would allow companies to include the greater of a) the 10%/5% restricted amounts as currently applies and b) €100,000. At Leyton, 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.

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.

3.   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. Very little detail was provided but the intention would appear to be to facilitate some form of tax-free reward to these employees.

Assuming this is the case, Leyton welcomes the initiative in that it can be used to attract and incentivise key R&D personnel. As a human driven pursuit, there is clearly correlation between the quality of the people undertaking R&D and the output achieved.

Leyton would have some concerns regarding the potential administrative burden placed on companies in operating such a scheme and we await with interest further information on how it will operate and be regulated.

Conclusion
Leyton welcomes the changes to the R&D Tax Credit announced as part of Budget 2012.  In our view, they show clear recognition by the Government of both the importance of R&D to Ireland Inc. and the contribution of SME companies to innovation in Ireland. However, we hope that these changes represent initial steps in a much more significant overhaul of the scheme that we believe is necessary if we are to succeed in achieving further increases in the level and quality of R&D undertaken in this country.

However, other changes to the R&D Tax Credit scheme that we feel could have an immediate, positive impact on the country have been overlooked. At Leyton we have calling for some time for the enhancement of the expenditure that can be included in the R&D claim for new, suitably qualified personnel. For example, 200% of the cost of new PHD hires could be taken into account in the R&D Tax Credit claim for a specified period. In our view, any initiative that might encourage companies to re-enter the jobs market and start addressing our chronic, unemployment figures needs to be given serious consideration.