R&D Tax Credits changes: Everything businesses need to know for 2024

  • By Robert Strutt
    • Mar 15, 2024
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R&D Tax Credits changes: Everything businesses need to know for 2024

R&D Tax Credits have helped foster innovation in Ireland for over two decades. However, significant changes to the scheme have been introduced for 2024, driven by global tax reforms and a renewed focus on maximising the credit’s impact.

In this article, we explain what’s changed and give insight into what the changes mean for businesses.

What are the key changes to R&D Tax Credits?

The R&D Tax Credit changes have been designed to encourage increased R&D activity and innovation in Ireland. These changes were announced over a series of bills, firstly the Finance Act of 2022 and then the Finance (No. 2) Act 2023.

Finance Act of 2022 R&D Tax Credit changes

The R&D Tax Credit changes from the Finance Act of 2022 included:

  • Revising the repayment of the new R&D Corporation Tax Credit
  • Introducing the ‘transitional period’
  • Introducing the ‘specified return’
  • Including cloud computing costs
  • Removing payroll tax restrictions
  • Introducing the ‘valid claim’ concept

Below, we explore the key changes in more detail, which apply to accounting periods beginning on or after 1 January 2023:

Revising the repayment of the new R&D Corporation Tax Credit

The way companies receive the R&D Tax Credits is being restructured. For accounting periods starting on or after 1 January 2023 companies will need to apply for a new R&D Corporation Tax Credit (instead of the previous R&D Tax Credit, which reduced a business’s corporation tax bill).

Instead of directly reducing a company’s Corporation Tax liability, the new R&D Corporation Tax Credit is paid out in three instalments over three years, rather than upfront. Companies with R&D claims over €25,000 will receive refunds on a 50%, 30%, 20% split, while those under €25,000 will receive their full refund paid in the first period.

Companies must then choose whether to receive each instalment as an overpayment (offsetting other tax liabilities) or if they want to receive a direct cash refund instead.

Introducing the ‘transitional period’

Revenue created a transitional period to help businesses smooth the way to adapting to the new rules. This means that for accounting periods ending between 31st December 2022 and 30th December 2023, companies can choose to claim under either the previous R&D Tax Credit or new R&D Corporation Tax Credit rules.

Introducing the ‘specified return’

Due to the shift away from directly offsetting the credit against corporation tax, Revenue introduced a ‘specified return.’ Companies will need to complete this return along with their corporate tax return.

Including cloud computing costs

Revenue now recognises cloud computing costs as allowable R&D expenses when incurred during qualifying R&D activities.

Removing payroll tax restrictions

The previous limitations based on payroll tax have been lifted, which means that the entire R&D Tax Credit is now refundable.

Introducing the ‘valid claim’ concept

The ‘valid claim’ concept means that companies must provide Revenue with all the required information to substantiate their claim, emphasising the need for clear and detailed record keeping.

Finance (No. 2) Act 2023 R&D Tax Credit changes

The R&D Tax Credit changes from Finance (No. 2) Act 2023 include:

  • Increasing the R&D Tax Credit rate to 30%.
  • Increasing the first-year payment threshold.
  • Introducing a pre-notification requirement.

Below, we explore the key changes in more detail, which apply to accounting periods beginning on or after 1st January 2024:

Increasing the R&D Tax Credit Rate to 30%

The most notable change is the increase in the R&D Tax Credit (and the R&D Corporation Tax Credit) rate from 25% to 30%, making investments in research and development even more attractive in Ireland.

The increase aims to maintain the benefit for companies subject to Pillar Two’s minimum tax while offering a substantial boost to SMEs and those outside Pillar Two’s scope (see below for more on Pillar Two).

Increasing the first-year payment threshold

The minimum first instalment threshold has doubled from €25,000 to €50,000. This is particularly advantageous for smaller companies and start-ups with smaller R&D claims as they’ll receive a larger portion of their credit earlier, improving their cash flow.

Introducing a pre-notification requirement

Companies making their first-time R&D claim (or those whose last claim was more than three years ago) must now notify Revenue of their intention to claim more than 90 days before making the claim.

Why have R&D Tax Credits changed?

The recent R&D Tax Credit changes are partly a reaction to changing international tax policies. They are also partly aimed at optimising the effectiveness of the R&D relief scheme to give Ireland’s innovative businesses a much-needed boost. The R&D Tax Credit changes play a vital role in achieving these goals by offering a valuable incentive, allowing companies to claim back a valuable portion of their qualifying R&D expenses.

Below, we explain the context behind the recent changes in more detail.

Changing international tax policies

The most significant driver of changes has come from the OECD’s Base Erosion and Profit Shifting (BEPS) project, which is an international scheme aimed at ending tax avoidance. ‘Pillar Two’ of the initiative sets a global minimum tax rate of 15% for large multinational companies.

To ensure Ireland’s R&D Tax Credit remained an attractive incentive while complying with Pillar Two, legislative changes were enacted in the Finance Acts of 2022 and 2023.

Optimising the effectiveness of the R&D relief scheme

The Irish government’s White Paper on Enterprise (2022-2030) emphasises R&D as a critical pillar, setting ambitious targets like doubling business expenditure on R&D (BERD) and significantly increasing overall R&D spending.

This needs to be viewed against the context of 2023’s European Innovation Scoreboard, which classed Ireland as a “Strong Innovator” with innovation performance at 115.8% of the EU average. However, Irish innovation has been experiencing slower growth than the rest of the EU, highlighting the need to boost innovation efforts to remain competitive.

How can my business prepare for the changes in R&D Tax Credits?

The changes allow businesses to make significant savings based on their eligible R&D work. The best way to prepare for making any R&D Tax Credits claim is to keep detailed records of R&D projects. This might include financial documentation that covers costs, timesheets that record employee hours, evidence of scientific, technological uncertainties and advancements, etc.

How Leyton can help

We help businesses maximise their R&D Tax Credits claims.

For over 25 years, our experienced teams have been helping companies worldwide benefit from valuable government tax incentives. Our experts are specialists at uncovering significant savings that can be made by claiming relief on eligible expenses from research and development projects.

Our tax experts have a comprehensive knowledge of current legislation, ensuring that your innovations are rewarded with full compliance.

Speak to one of our experts to find out more about how we can help.

Author

Robert Strutt

Director - Tax UK & Ireland

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