The Department of Finance has published Budget 2023: Report on Tax Expenditures 2022. The report lists the tax expenditures that have been in effect since the previous report and contains five tax/tax expenditure related reviews/reports, including an evaluation of the corporation tax R&D Tax Credit.
The report also sets out the top ten most expensive tax expenditures in terms of revenue foregone, as well as the most expensive tax expenditure under each tax category. These include the R&D tax credit, CGT relief on certain disposals of land or buildings, certain company reconstructions and amalgamations for stamp duty, and the VAT refund to flat rate farmers for construction.
Section 766 TCA 1997, was first introduced in 2004 and initially allowed companies reduce their current year corporation tax liability by 25 percent of qualifying R&D expenditure. There have been significant changes to the regime since its introduction including the introduction of the ‘repayable credit’ and key employee relief. The objective of the R&D tax credit is to incentivise businesses to increase the level of funding they allocate to R&D activities, thereby fostering innovation, economic growth and competitiveness thus supporting the creation of additional employment and economic activity in the State.
The annual cost of the relief is currently estimated at €658 million as of 2020, being 5.6 percent of corporation tax receipts. Overall, the average cost of the credit per claimant was €400,000 in 2020, with large companies averaging more than €2.5 million per claim compared to approximately €134,000 for SMEs. While the majority of claimants for the credit are SMEs, analysis suggests that domestically-owned SMEs tend to underperform in converting their R&D tax credit support into higher levels of R&D expenditure relative to their larger, often foreign-owned counterparts. This is likely to reflect the greater degree of R&D constraint faced by SMEs. In evaluating the corporation tax R&D tax credit, the report also considered the responses to the recent public consultation, to supplement the quantitative analysis.
The report recognises that the R&D tax credit regime continues to be a strategically important element contributing to Ireland’s success in becoming a globally competitive innovation hub. The report concludes stating:
“Anecdotal evidence is presented time and again on the usefulness and value of the R&D tax credit, with significant positive spill-over effects for employment, higher education and the wider Irish business network.
The R&D tax credit has grown and evolved since its first introduction in 2004, in response to business and stakeholder feedback. It will continue to change in light of international tax changes, ensuring that Ireland’s R&D supports remain competitive in a globalised world.”
Previously a number of targeted measures were announced in Budget 2020 and introduced in Finance Act 2019, subject to a commencement order pending State aid approval. Following engagement with the European Commission, the report indicates that it is intended that Finance Bill 2022 should provide for the removal of these un-commenced provisions from the Taxes Consolidation Act 1997.
As part of Budget 2023, the Minister for Finance announced changes to the payment provisions for the R&D tax credit to align with international tax reforms taking place at EU and OECD level. Further details regarding these changes are available here.
The other reviews contained in the report relate to:
- Cost benefit analysis of Section 481 Film Relief – page 46;
- 2022 evaluation of Ireland’s Knowledge Development Box (KDB) – page 143;
- Report on the High Income Earners Restriction (HIER) – page 158; and
- Report in the Special Assignee Relief Programme (SARP) – page 170
The report is available on gov.ie.