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More innovation could be fostered in Ireland

More innovation could be fostered in Ireland

More innovation could be fostered among SMEs in Ireland if there was increased awareness of the R&D tax credit (“RDTC”), according to KPMG’s Innovation Monitor 2019, launched today.

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Kelli O'Malley

Communications Manager

KPMG in Ireland

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KPMG Innovation Monitor 2019 finds that:

  • Only 55% of SMEs surveyed had claimed R&D tax credit
  • Only half of respondents were aware of the Knowledge Development Box
  • Greater familiarity with these incentives would encourage additional R&D activity

More innovation could be fostered among SMEs in Ireland if there was increased awareness of the R&D tax credit (“RDTC”), according to KPMG’s Innovation Monitor 2019, launched today. The Innovation Monitor report is based on findings from a survey carried out by Red C Research on behalf of KPMG with 100 participants, all of whom were in receipt of R&D grant funding from Enterprise Ireland. It found that only 55% of these companies were claiming the RDTC.

The launch of the report coincides with a public consultation by Government on the RDTC, which is open for submissions until 7 June 2019. A key focus of the public consultation is seeking views to address the relatively low uptake of the current tax credit by SMEs and ways of improving the current credit system to make it more attractive and supportive to SMEs – key areas which are examined in the KPMG Innovation Monitor report.

The Irish Government has set a target for total investment in R&D in Ireland to reach 2% of GDP (2.5% of GNP) by 2020. This is supported with substantial investment from the state, including through Enterprise Ireland, with direct supports in Research, Development & Innovation (“RD&I”) and indirect supports in the form of RDTCs . A 2016 Department of Finance review of the RDTC found that it represented a high return on investment, with an additional €2.40 spent on R&D for every €1 in tax foregone.

RDTC & KDB

The survey findings indicate that companies which do avail of the RDTC value it and that it is a driver of R&D and innovation in the economy, with some companies stating that it is more beneficial to driving R&D activity than grant aid.

The results of the survey also indicate that the RDTC could be made more attractive to earlier stage companies, by accelerating the cash payment to companies not yet paying tax from the current three-year period to one year, with minimal impact to the exchequer.

Meanwhile, only half of respondents were aware of the Knowledge Development Box (“KDB”), a tax incentive introduced by Government in 2015 providing an effective tax rate of 6.25% for income generated from intellectual property which has been developed in Ireland, and only one third (34%) of those who were aware of the scheme intended to claim the incentive in future. This again indicated a lack of awareness about the scheme, which aims to encourage companies to locate the high-value jobs associated with intellectual property creation in Ireland.

Report findings

Commenting on the findings of the report, Damien Flanagan, R&D Tax Partner, KPMG in Ireland said:

“Innovation is a key driver of competitiveness, both for individual firms and national economies. The Irish Government has recognised this and has set ambitious targets for investment in RD&I, to bring Ireland in line with the most innovative EU countries.

However, Ireland’s exceptionally strong economic growth in recent years has meant that RD&I expenditure when expressed as a percentage of GDP has remained stubbornly around the 1% level – approximately half the European average, which is our ultimate goal.

Our 2019 survey has thrown up some surprising results – most notably that only 55% of companies that are in receipt of R&D grants from Enterprise Ireland are also claiming the R&D tax credit. Having looked at the reasons behind this we believe that some relatively straightforward and cost neutral measures could lead to an increase in the uptake of the R&D tax credit among SMEs. This in turn should stimulate additional R&D activity and help Ireland achieve its investment targets. There is real economic substance and physical presence behind the companies that claim the R&D tax credit and it should continue to be nurtured.”

Julie Sinnamon, CEO, Enterprise Ireland, added: “The report shows that there is a need to drive greater familiarity with the available supports and schemes to encourage increased uptake as well as additional R&D activity. For Irish businesses to remain sustainable and competitive, they need to ensure that their products and processes are cutting-edge and that they are investing in R&D.” 

Key KPMG recommendations from the report include:

  • The Government and stakeholders should continue to promote awareness of the RDTC with a particular focus on those aspects which seem to be poorly understood, i.e. the rate applicable, the fact that it can be payable in cash, and the Revenue guidance in relation to scientific audits. A complementary campaign to raise awareness of the KDB should also be undertaken.
  • Enhancing the value of the RDTC to smaller companies that are not taxpaying, by paying it over one year, instead of three - accelerating the payment would entail no significant additional cost to the exchequer, other than the short-term cost of funds.
  • 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 RDTC both more financially attractive and more readily understood.
  • Current thresholds around limitations on outsourced activity should be extended for SMEs, as many smaller companies will not have access to the resources needed to carry out all their R&D work in-house. 

© 2019 KPMG, an Ireland partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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