Startups and SMEs gain from bigger R&D credit and investor reliefs

SMALL firms with up to 250 workers will be able to write off 30pc of R&D costs – and get the benefit more quickly.

Budget 2020’s changes to the current 25pc rate include a commitment to allow small firms to use the write-off while they are still in product development stage and yet to generate sales.

Currently, small firms must wait to offset any R&D credit against payment of corporation tax – a profit point they might never reach without sufficient early-stage finance.

Mark O’Sullivan, head of R&D technical services at BDO Ireland, said the change means startups gain “quicker access to the credit rebate and thus improve their cash flow”.

He said the move still leaves Irish firms at a disadvantage to competitors in the UK, which provides a 33pc R&D credit for loss-making SMEs (small and medium-sized enterprises).

The Budget also raises the current 5pc tax credit for outsourced R&D work to 15pc – so long as the provider is based in a third-level institution.

KPMG partner Olivia Lynch said this change was particularly useful to smaller firms focused on developing a new product or service with the help of outsourced R&D.

“A smaller firm might have a bold new idea but, at the start, needs outside expertise. That expense now will produce a more useful tax credit and stimulate R&D activity at universities as well,” she said.

Ms Lynch said changes to the Employment and Investment Incentive (EII) scheme also should spur increased venture capital investment in smaller firms – and encourage investors to stay committed longer.

Existing EII rules require investors to wait four years to receive their full income tax relief. Budget 2020 proposes to give them a full 40pc deduction in the first year of investment. It also creates a new incentive, doubling the investment limit to €500,000 if they promise to back the company for at least 10 years.

But analysts said the proposed tweaks to the Key Employee Engagement Programme (Keep) – which seeks to help small firms recruit and retain top staff by offering tax breaks on share options – fell far short of requirements.

EY partner Michael Rooney said fewer than 60 employees nationwide had received benefits from Keep in the past year and Budget 2020 did little “to remove the barriers that are deterring startups and SMEs from availing of the programme”.