The traditional image of R&D is of a group of scientists in a lab somewhere working on projects together. This has been overtaken by a model where multiple labs and groups around the world work on projects together and “follow the sun” by handing on the project to one another at different times of the day depending on their location and time zone. According to KPMG partner Damien Flanagan, organisations now might have four R&D locations in different time zones all working on the same projects 24/7. This has implications for Ireland, which may have to adjust R&D incentives such as the Knowledge Development Box in order to fit with this new reality.
Government initiatives like the R&D tax credit and the Knowledge Development Box are aimed at promoting R&D as a primary driver of economic growth. How do they perform?
The Government’s Innovation 2020 strategy has set a target for total investment in R&D in Ireland to reach 2 per cent of GDP by 2020. While some progress has been made towards that, total spend in 2018 reached just 1.05 per cent of GDP, despite State investment of €751 million on stimulating R&D activity that year. This outturn must be placed in the context of rapidly growing GDP, however, and total spend on R&D by companies in Ireland has been growing significantly in recent years.
While the increased spend is encouraging, the slow progress towards the Innovation 2020 target has led some to ask if Ireland is getting sufficient bang for its buck when it comes to the various supports offered for R&D activity. “I certainly think those supports are delivering for the taxpayer,” says KPMG partner Damien Flanagan. “Every time I look at the IDA newsletter, I see more R&D investment announcements and the research and development tax credit, capital allowance regime and other incentives play a big role in that.”
An R&D job might create two manufacturing jobs in two years’ time.
According to the KPMG Innovation Monitor report, published in June of this year, just 11 claims had been made under the scheme between its introduction in 2015 and the end of 2018. The report found a lack of awareness of the scheme among SMEs surveyed, with just 50 per cent of them being aware of the incentive. “Improved awareness might help the take-up,” Flanagan adds.
“Things can always be improved and there were a number of recommendations in the Innovation Monitor in relation to the R&D tax credit,” he continues. The report surveyed companies receiving R&D grants from Enterprise Ireland – but only 55 per cent of them are claiming the R&D tax credit as well.
Among those recommendations were enhancing the value of the tax credit to smaller companies by paying it over one year instead of three. This would entail no significant additional cost to the exchequer, other than the short-term cost of funds. In addition, a wider selection of costs – perhaps more closely matching those allowable for Enterprise Ireland grant aid – should be eligible for the tax credit. This would make the tax credit both more financially attractive and more readily understood.
That said, the tax credit is highly rated overall. “What we are hearing from our clients is that they are very happy with it, they understand the regime, and they do use it.”
Ireland measures up quite well internationally when it comes to its R&D infrastructure but there is no room for complacency.
Talent, tax and the environment for doing business remain the key ingredients underpinning Ireland’s performance as a key location of R&D activity, according to KPMG partner Damien Flanagan. “It won’t come as news to anyone, but the most important factors are access to the right people and skills,” he says. “If you don’t have them, you won’t attract R&D centres to Ireland. We have been good at that and we have a good talent pool. The global leaders in medtech and pharma and so on are all here and we have quite a good skillset nationally in those areas.”
But there are areas to address. “We know that the universities have slipped on the world rankings,” Flanagan adds. “That’s never a good thing and it’s something to be mindful of if we are looking to attract the brightest and the best. It is something to address.”
The business environment is also key. “Multinational companies don’t invest for the short term,” he notes. “Having confidence in the stability of the environment and that the incentives will continue to be on offer is important. We have clients who are competing globally for R&D projects. They have to put a business case to the internal decision-makers on why the project should come to Ireland. The business environment and the cost of doing business are very important factors. Incentives such as the R&D tax credit and the Knowledge Development Box as well as IDA and Enterprise Ireland support affect that.
“They need to be able to bank on Ireland as a long-term bet and they need the business case to stand up for three, five, or 10 years into the future,” he adds.
These articles originally appeared in The Irish Times and are reproduced here with their kind permission.