R&D is fundamental to the Irish economy, however COVID-19 has impacted on the conduct of R&D and has highlighted some important policy issues according to Ken Hardy and Damien Flanagan of KPMG.
Ireland’s talent pool, multicultural society and can-do attitude to business has helped develop the country as a key gateway into Europe, for US MNCs in particular. These factors, along with tax credits and grant funding, places Ireland at the top table of places to undertake R&D activity.
Ireland has an attractive R&D tax credit rate at 25% for large companies, representing one of the highest rates internationally, and an even higher rate of 30% for small and micro companies. Our R&D tax credit regime has been recognised in the past as being ‘best-in-class internationally’. We also have an established OECD-approved Knowledge Development Box which, in the right circumstances, enables companies to pay a reduced rate of tax (6.25%) on patented products and copyrighted software. Interestingly, indigenous companies are more likely than multinationals to be able to claim the KDB as all their R&D work is typically undertaken in Ireland. In addition, the IDA, Enterprise Ireland, and Science Foundation Ireland offer a range of attractive grants. From our own recent experience, we have seen that they are open for business and actively providing funding support to companies undertaking new R&D projects.
COVID-19 and Life Sciences
Ireland is well known for its very successful pharma and med device sector with increasing expertise in biologics. Most of the world’s top life sciences companies have significant R&D presence in Ireland. However, what is perhaps less well known is that we are also fast developing into a significant player for R&D in the software and technology sectors.
Inevitably, we have witnessed disruption to companies’ R&D lifecycle and product pipeline as a result of the crisis. In some sectors, such as medtech, where products are used for elective surgery, a decrease in demand has been experienced. In some areas of life sciences where R&D personnel are re-allocated to COVID response projects, companies are continuing only essential R&D activities and pausing non-essential R&D activities, including early-stage activities. This could impact upon the future pipeline of these companies. However, in other sectors, such as software and technology, R&D is continuing at pace.
One multinational medtech client redeployed resources, from early-stage R&D projects into R&D projects which are closer to completion, in order to ensure that they are reaching commercialisation as early as possible. This will have a longer-term impact on the delivery timing for new product and process improvement projects. We are also seeing the implementation of stringent COVID-19 control protocols, including temperature checks on arrival and during the course of a day, social distancing, restricted access with only operators allowed on site, while R&D engineers and managers, finance and administration personnel etc work remotely.
However, other areas within medtech and biopharma have seen companies enter this field in direct response to COVID-19. If this influx of new activity is sustained, we may see an increase in R&D output in these sectors.
We may see more pharma companies diversify their supply chain to de-risk COVID-19-related stoppages and shortfalls from some suppliers, and we expect that this would lead to greater R&D activity in terms of broadening production capability as a function of material supply, or lack thereof.
The impact of new ways of working
As a result of the crisis, in some sectors, R&D teams have been on reduced hours or furloughed for a period since March, as a result of projects being placed on hold or resources re-focused elsewhere, such as manufacturing activity related to COVID response initiatives. In the short to medium term, COVID-19 ‘return to work’ restrictions mean that a portion of R&D personnel time is spent working from home, thereby reducing the allowable numbers on-site in line with social distancing. While many companies, particularly in the tech sector, can continue R&D remotely, in others there may be a contraction in R&D activity during 2020, and beyond.
To remain competitive, cost control and cost reduction projects are likely to be in focus for the next while. We will likely see companies undertake R&D projects in these areas to seek productivity improvements, waste minimisation, automation etc.
In the software sector, we have seen the acceleration of digitisation projects. COVID-19 may be the catalyst to drive companies towards a digital platform that can enable more R&D activity to be performed on a remote basis. For companies that have been directly impacted by the shut-down we have seen R&D work pivot towards other projects that could deliver alternate revenue streams online.
Support in a crisis
RD&I is supported in Ireland through a mix of grants (mainly from Enterprise Ireland, the IDA and Science Foundation Ireland), and tax incentives such as the R&D tax credit and the Knowledge Development Box. Ireland’s R&D tax credit regime has, up to now, been seen as best-in-class.
In response to the ongoing crisis, Revenue announced on 1 April 2020 that companies availing of the R&D tax credit ‘cash refund mechanism’ could receive accelerated repayments. This meant that companies could receive repayments from Revenue in April/May 2020, rather than September/October 2020. This was greatly appreciated by claimant companies, who include many SMEs. We have seen a significant uptake in companies availing of the accelerated refund and in the case of SMEs, getting the cash refunds quicker could be the difference between R&D programs continuing or ceasing.
Considerations for policy makers
A further improvement that we would like to see is the acceleration all future cash instalments to be paid in one instalment, rather than three. This would see companies getting cash, for example, in 2020 that would normally be paid to them in 2021 and 2022. These cash refunds could be a lifeline for many companies, enabling the company to continue trading in the worst cases or ideally investing in further R&D projects.
Some of our clients in the life sciences space are working on possible treatments for COVID-19, undertaking critical R&D activity in Ireland. As happens in many instances, the manufacturing activity may follow the R&D activity and we could see an investment in further ‘sticky assets’ should this occur. Similarly, Ireland’s large footprint in the life sciences sector, with most of the world’s largest companies having large plants here, could see further investment in scale-up and manufacture of COVID-19 treatments and vaccines. To continue to attract this investment, we must ensure that our R&D tax credit regime remains attractive and best-in-class. The Irish Revenue have a big role to play in this, ensuring that the governance of the tax credit is consistent year-to-year and sector-to-sector. Only as recent as 1 July, updated Revenue Guidance for R&D tax credits made an amendment which goes against 16 years of practice. Any additional uncertainty at this time should be avoided, where possible.
Budget 2020 announced improvements to the R&D tax credit for small and micro companies. One such improvement was an increase in the rate of tax credit to 30%. Given the pressures that all SMEs are under, not just small and micro, we would call for this increase to be applied to medium size enterprises also.
R&D support and academia-led projects
We believe that R&D support could be expanded further; as reported in a recent European Commission paper, Ireland still lags well behind other states in terms of public R&D spend. In March 2020, the Irish Government launched a National Action Plan in response to COVID-19. As a key action in this plan, a coordinated RD&I funding opportunity was launched to enable the research and innovation community to respond to the immediate and pressing needs of society arising from the pandemic. However, these supports required collaboration between industry and academia. This favoured companies with pre-existing relationships with academia and did not take into account the vast majority of industry who do not have these relationships or those that didn’t have time to build the relationships before the calls closed. It would be worth considering another fund, or splitting this fund, to support projects that are industry-led, rather than academia-led to take late-stage applied research projects to market.
Ireland’s part in the global COVID-19 recovery
In life sciences, COVID-19 has highlighted that companies located in Ireland often lead the way in diagnostics, with the development of rapid testing equipment. The same applies to other areas of COVID-19 treatment, from the emergency care provided for by ventilators, to complicated biologics medicine, to the mass production of vaccines. Irish firms could play a key part in the global recovery if the right R&D environment is present.
It is clear that we need to do more in terms of publicly funded R&D spend – particularly in support of SMEs – to reach parity with other EU states. This was made notable by a recent European Commission paper outlining that Ireland still lags well behind other states in terms of public R&D spend. While business expenditure on R&D might naturally depend on business expectations, publicly funded R&D could be more counter-cyclical, providing a buffer to the effects of economic downturns. Ireland has a long way to go in this regard.
For Ireland to optimise its R&D investment we might consider a broader approach which looks at where the future “R&D dollars” are going to be spent by industry. Streamlining research programmes to align with these key areas may help to increase collaboration between industry and academia.
The importance of collaboration between industry and academia
Collaboration between industry and academia has never been as important as it is now; not just nationally but also internationally. Like many other countries, Ireland has been trying to increase the amount and quality of this collaboration.
In our experience, we would typically see less appetite by large enterprises to collaborate with academia due to the timelines involved, coupled with their own significant in-house expertise and facilities. In a broader sense, industry can leverage these collaborations with academia to nurture relationships with emerging experts in their specific industry.
Sometimes difficulties arise in structuring these collaborations due to issues around IP and contractual obligations requiring significant administrative effort, for a relatively modest amount of funding. We are primed for companies to leverage academic skills, facilities and infrastructure, with a well-established national framework enabling industry and academia collaboration, spearheaded by the SFI research centres.
As a result of COVID-19 we will more than likely see increased buy in to industry-academia collaborations. Collaboration with industry can enable academia to source funding for the construction of research infrastructure, employment of R&D staff and to fast track technical developments up the TRL scale. In addition, universities have increased their capabilities in providing analytical, testing, and characterisation services. We would expect to see an increased uptake from industry of these resources.
For the most part, HEIs have tech transfer offices with the skills and expertise to identify opportunities and partner with suitable companies. Streamlining of this process is vital to establish these collaborations, as is balancing expectations between protecting IP and publishing research data.
All told, COVID-19 has had a significant impact on R&D in Ireland - providing both major challenges, but also accelerating positive change. Industry, government and policy makers are aware of the major contribution R&D makes to Irish economic performance; our hope is that the focus this important area has received to date will continue as a priority.