Research and development tax credit and innovation compass: RCK Partners round-up and response

^{Tánaiste Simon Harris publishes research and development tax credit and innovation compass: RCK Partners round-up and response}

^{Co-authored by Kirsten Winsryg and James McHugh}

‍Introduction  

Simon Harris, Tánaiste and Minister for Finance, has announced the publication of the Research and Development Tax Credit and Innovation Compass, setting out the Irish Government’s medium-term vision for the future of Ireland’s innovation support. The Compass follows last year’s R&D Tax Credit consultation process and provides insight into the policy considerations behind issues raised by stakeholders and R&D-active companies.

While it does not introduce immediate legislative change, it signals the Government’s direction of travel, with a clear emphasis on scheme design, simplification, and competitiveness rather than rate increases. The paper suggests that a further rate increase to the R&D Tax Credit is unlikely in the near term. Instead, the Government's attention is focused on structural reform and administrative efficiency.

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The four core areas of focus

The Compass outlines a medium-term plan for the development and enhancement of Ireland’s R&D regime to better support Irish innovation across four broad areas:
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1. Qualifying Expenditure:

A key area that the government is reviewing is qualifying expenditure, specifically whether the current definition of qualifying expenditure is too narrow. This has been brought to their attention as some argue that certain genuine R&n activities fall outside the current framework. The Government acknowledges this concern and is considering potential refinements. However, it also highlights the Exchequer risk of widening the definition too broadly, given the high and growing cost of the scheme. A balancing act is clear and it is clear that fiscal sustainability needs to be balanced with broadened qualifying expenditure to reflect modern innovation.

2. Capital Expenditure

Capital building expenditure, including the 35% building use test, remains in scope for review.

However, the compass states that this is a medium-term priority, with current expenditure issues taking precedence. While stakeholders have called for greater flexibility around capital usage thresholds, immediate change appears unlikely.

3. Administration and Simplification

Administrative simplification is a clear priority. The Knowledge Development Box (KDB) is due for formal review in 2026. This is significantly underclaimed in Ireland, despite being designed to complement the R&D Tax Credit regime by rewarding commercialisation of intellectual property, so this review is welcome.

4. Supports for Innovation

To remain competitive, the Irish Government is reviewing options to support broader Irish innovation and to ensure that Ireland remains internationally competitive. The paper explicitly notes that it is not feasible to simply expand the current R&D credit to cover all innovation activity due to concerns over broadness and therefore the associated cost.

In our view

The newly released ‘Research and Development Tax Credit and Innovation Compass’ is a positive sign that the Irish Government is considering several meaningful changes to the current R&D scheme. While engagement with the R&D tax credit continues to increase, so too does the scheme’s cost to the Irish taxpayer, a factor that appears central to the Department of Finance’s thinking. Future reform will inevitably involve balancing:

• Exchequer sustainability
• Ireland’s competitiveness
• The need to attract and retain innovative businesses

Key areas that would strengthen the regime

In our view, based on the Compass, the following key developments would support the R&D tax credit scheme and would be a meaningful and welcome addition to the Irish innovation framework:

• Clarifying and modernising the definition of connected-party and subcontracted expenditure
• Carefully broadening the scope of the qualifying expenditure definition
• Reviewing the capital expenditure de minimis usage test (medium-term priority)
• Conducting a substantive review of the Knowledge Development Box
• Potential introduction of a new innovation tax credit for decarbonisation and green objectives, digital transformation and experimental development. This could sit alongside the existing R&D credit, offering more targeted policy alignment with national strategic priorities.

Summary

The Compass does not deliver immediate change, nor was it intended to. Instead, it provides transparency on policy direction and confirms that reform is under active consideration. While the statement is simply an extension of their work looking into potential changes to the R&D Tax Credits, it showcases what is at the forefront of respondents’ minds.

‘Supporting Ireland’s competitiveness and contributing to stable economic growth and high-quality employment’ is a very real goal to encourage forward thinking, innovative companies, to locate in Ireland, as well as rewarding Irish businesses who are striving towards a more competitive baseline. The coming years, particularly the subcontracting review and the 2026 KDB review, will be vital in shaping the next phase of Ireland’s innovation policy.

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RCK Partners will continue to monitor developments closely and will communicate these with our clients and network as updates evolve.

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