At Scale Ireland‘s recent Regional Start-Up Summit, the Taoiseach emphasised that he wanted to see more businesses benefit from R&D Tax Credits. But Scale Ireland’s own research found that 56.5% of start-up founders and CEOs haven’t actually used the scheme.
Take-up of Ireland’s R&D Tax Credits has been a concern for years, but what more can be done to encourage businesses to apply? The scheme is already world-class, offering some of the most generous and attractive incentives for innovation among OECD countries.
To answer that question, the Department of Finance has recently published a Research and Development Tax Credit and Innovation Compass. There’s been a growing sense of anticipation around the document, as the Minister for Finance had originally promised to publish the Compass “in the coming weeks” following Budget 2026 in October last year.
While it doesn’t make any policy commitments, or even give a firm timetable, it does highlight areas for potential improvement that will be considered by policymakers. In this article, we explain everything businesses need to know about the reviews proposed within the Compass.
Reviews proposed within the R&D Tax Credit and Innovation Compass
Much of the Compass is devoted to listing the ways that the R&D Tax Credit has been enhanced over the years, as well as presenting data on the cost and positive impact of the scheme.
The document also proposes key areas for review that could lead to future changes to improve the scheme. Below, we’ve summarised each of the proposed reviews.
Subcontracting rules
One of the bolder areas of the Compass is the mention of a review of subcontracting. This review would look at whether the scope of qualifying subcontractors can be widened to include connected subcontractors, and whether the current caps on subcontractor expenditure can be amended or improved.
The Compass also provides a useful clarification by saying that, currently, unconnected subcontractors can be located anywhere in the world. This written confirmation matters, because historically the legislation has often been read as implying that a subcontractor must be based in Ireland, the UK or the EEA.
Qualifying expenditure
There is reference to looking at the definition and interpretation of expenditure on R&D, potentially expanding the eligible fields to accommodate new scientific and technological advances, as well as a broader review of what counts as qualifying expenditure, which might widen the scope of claimable costs.
Capital expenditure
The Compass proposes a review of the 35% de minimis usage test, including whether the current four-year usage test should be lowered.
They also suggest reviewing the linkage between R&D Tax Credits and Capital Allowances for industrial buildings.
The rate of the R&D Tax Credit
The Compass confirms that Revenue will continue to review the headline rate of the R&D Tax Credit, to ensure that it’s globally competitive and cost-effective for the Exchequer.
Payment of the credit
The Compass suggests it will look at when the credit is paid, but there’s a cautious caveat to this as paying the credit earlier (as opposed to spreading it over three years) would accelerate costs for the Exchequer as well as raise the risk of fraudulent claims.
Preliminary tax
Right now, when you’re working out the preliminary tax you need to pay, you can’t count the later R&D Tax Credit instalments (the second and third ones). The Compass says this could be looked at, as it has been suggested that companies should be able to take those later instalments (and even payable credits) into account when calculating preliminary tax.
Again, there’s a caveat to this review: the increased risk to the Exchequer and difficulties with existing preliminary tax laws are both flagged as potential barriers to any changes.
Overheads
The Compass says it will review simplifying overheads by letting businesses claim a qualifying overhead cost as a fixed percentage of wage costs. This includes proposals to allow 20% of qualifying R&D wage costs to be treated as qualifying R&D expenditure.
However, the proposal to create a list of all qualifying overhead costs is essentially ruled out as unfeasible, and while a fixed percentage determination might simplify administration, the Compass flags that it must ensure companies that identify their R&D costs on a ‘wholly and exclusively’ basis aren’t disadvantaged.
Wage costs
The Compass highlights a simplification that’s already been made (noting that they’ll keep it under review) where an employee spends at least 95% of their duties on qualifying R&D, businesses can treat 100% of that employee’s emoluments as qualifying costs.
Innovation support
While proposals are briefly discussed around using R&D Tax Credits to support innovation (and not just R&D), the Compass suggests that it’s unlikely there will be much movement here.
The Compass says work on a tax-based support for innovation will continue in 2026, but it’s “not considered feasible to extend the current R&D Tax Credit to encompass innovation.” Instead, its initial focus is on other options to provide targeted support for innovation.
That said, where companies are currently undertaking qualifying R&D to achieve any of the innovative areas mentioned within the Compass (including decarbonisation and green objectives, digital transformation, and experimental development), may still be eligible for an R&D Tax Credit claim (assuming the usual R&D tests are met).
Knowledge Development Box
The Compass says that the Knowledge Development Box (KDB) regime will be reviewed in 2026 alongside the innovation work, to consider the pros and cons of extending the measure, which might include the option of integrating it with a new innovation support scheme.
Leyton’s view
As part of the consultation process that informed the Compass, we submitted our response to the Department of Finance, explaining what we felt needed to change.
We’ve been consistent in our view that the R&D Tax Credits scheme needs reform, to better reflect modern scientific and technological innovation (in the areas of mathematics, quantum modelling and AI large language model development), as well as to ease the administrative burden on smaller businesses. We therefore welcome any changes that will simplify the scheme, and widen the scope of qualifying activity, and look forward to seeing the outcome of Revenue’s reviews.
But we would also like to see stronger administration measures considered as part of their reviews. The Compass doesn’t show any commitment to plans for a specialist R&D team within Revenue, which we feel is a missed opportunity, as a dedicated team could process claims faster and make sure the rules are applied more consistently for all.
At the moment, when a claim (or an audit response) is submitted, there are no timelines that a taxpayer can hold Revenue to account, and getting updates on the status of a claim can be difficult. It would have been a step forward to see some form of service level agreement for Revenue to hold themselves accountable to, to give businesses more certainty, especially where cashflow planning depends on when a claim will be processed.
We also hope that Revenue takes an ambitious approach to the reviews outlined in the Compass. At times, the document takes a noticeably cautious tone when discussing structural changes. But we believe that many of these changes, if implemented practically, would achieve the very thing the Taoiseach wants to see: more businesses benefiting from the scheme to drive growth, investment, and skilled jobs in Ireland.
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