Irish R&D Tax Credit: The first audits by the Revenue of the tax scheme that was introduced in 2004 to promote spending on research and development by foreign-owned and indigenous firms, have found a high level of abuse. Last year, the Government told Finfacts that it didn't know if even one claim by a company, had been rejected since the scheme became operational in 2004.
The cost of the scheme in 2013 will be at least €300m, including an additional estimated €45m, following an adjustment in the Finance Act 2013.
The Irish Times reports today that the "tax credits were not being properly claimed in 26 out of 32 firms examined, resulting in €6m being returned to the exchequer."
The 25% tax credit not only enables companies to cut the existing low corporate tax rate of 12.5% but it can be also used to cut an employee's income tax liability. Enda Kenny, taoiseach, uses a bogus effective tax rate to suggest that the actual or effective corporate rate is close to the headline rate.
Anyone at government/ public service level, the enterprise area or in Big 4 accounting firms, who claim to be surprised by The Irish Times' revelation, is either disingenuous or a fool.
The Revenue told the newspaper that it "was taking the necessary action against taxpayers in cases of non-compliance. The majority of cases involved 'accounting errors' and only one involved complete denial of a claim for tax credits."
The results to date demonstrate that use of the credit, which enables companies to set off 25% of R&D spending is a “significant risk,” according to records.
The term 'accounting errors' suggests that over-claiming was unintentional but the system makes deliberate over-claiming inevitable. Tax advisers were aware that there were no audits being done and besides, the Revenue did not have staff that could credibly challenge the likes of Pfizer, Google or Microsoft.
The Revenue has a definition of R&D but this area of spending is a 'grey' one and what a company may term R&D, may have little to do with innovation.
Claims are made via self-assessment on Corporation Tax returns.
IDA Ireland, the inward investment agency, uses the tax credit as an inducement. It does not define what it terms the 'R&D component' in a new project and it appears that the tag 'centre of excellence' is an imprimatur for a knowledge activity that would support use of the tax credit.
The number of IDA client companies investing more than €100,000 per annum in R&D was at 293 in 2012 -- 28% of the total.
Indigenous companies at about 900 in 2010, have accounted for a big surge in tax credit claims but there is no evidence of a surge in innovation. Foreign firms are responsible for almost three-quarters of business R&D but these firms do not do significant research in Ireland.
Dr Fred Logue, founder of New Morning IP, the intellectual capital consultancy, said last year;
"Our analysis does not show any link between the introduction of the R&D tax credit and increased patenting activity by indigenous Irish companies.
In fact in our experience this tax credit has been used as a way of getting “free money” without any real attempt to protect the R&D results through patenting or other IP strategies. In fact the R&D tax credit scheme is widely promoted by tax advisers and is primarily seen as part of a tax reduction strategy rather than as a foundation to build an IP strategy."
Patent applications at the Irish Patents Office from Irish residents (including foreign companies and also inventions that were not made in Ireland) in 2012 were at the lowest since the early 1980s.
Michael Noonan, finance minister, announced in his Budget 2013 that a review of the tax credit would be carried out in 2013 and submissions from the public would be requested: here is the Finfacts submission (Microsoft Word)
Finfacts, Aug 2013: Irish Innovation: Evidence of science policy failure mounts
Irish Science Policy: 2020 replaces 2013 as target to be 'best country in...world for scientific research'
Irish Economy: Innovation, a failed enterprise policy and inconvenient facts for 2013
A year ago, Finfacts requested information from the Department of Jobs, Enterprise and Innovation on the take-up of the credit
The Department provided the following information:
Research & Development Tax Credit
2010 Estimated cost €223.7m
Number of claims 1,172
2009 Estimated cost €216.1m
Number of claims 900
2008 Estimated cost €146m
Number of claims 582
"The R&D tax credit is claimed by companies on a self-assessment basis and the Revenue Commissioners has the right to audit the claim under the legislation however the rate of rejection resulting from audits is not available."
The Department's 'Strategy for Science, Technology and Innovation Indicators - December 2011' report stated that the number of firms applying for R&D tax credits had "increased dramatically" from under 200 in 2004, to 600 in 2008 and around 1,000 in 2009. The total value of credits claimed in 2009 was estimated at €385m "leveraging up to four-times that in additional spend."