Irish companies investing in research and development have received a new year’s boon with another increase in the amount of spend they can offset against tax.
As of 1st January, the R&D Tax Credit rate increased from 30% to 35% of qualifying expenditure. This is the second such increase in two years, meaning the value of R&D Tax Credits has increased from 25% to 35% since the end of 2023.
Announced as part of Budget 2026, the move continues a programme of significant reform of R&D tax relief in recent years, and underlines the government’s determination to invest in the country’s innovation and knowledge economy.
Along with the increase in the basic credit rate, the threshold for the amount that can be claimed in full in the first year has increased from €75,000 to €87,500. Another change means companies can now treat 100% of an employees pay and other benefits as qualifying expenditure, as long as 95% of their time is spent on R&D projects that fall under the scope of the scheme.
How do Tax Credits work?
Anything a business spends in the course of its operations gets deducted from revenue for tax purposes. The difference – the profit the business makes, unless it is unfortunate enough to spend more than it earns – is liable for Corporation Tax.
R&D Tax Credits in effect work as a double deduction. What a company spends on research and development is deducted from earnings to calculate profit in the usual way. But on top of that, a further 35% of qualifying R&D expenditure can now be deducted from profits before tax, reducing the amount of Corporation Tax a business has to pay.
The credit is available to any business that pays Corporation Tax in Ireland, although the research and development the expenditure relates to can happen anywhere in the EEA. Projects that qualify for R&D Tax Credits must pass what is known as the ‘science test’. This essentially has two elements:
- Qualifying R&D must not only be in the fields of science and technology, it must also be aimed at making a clear advancement in those fields, and resolve some kind of uncertainty.
- The form of the project itself must involve systematic, investigative or experimental activities, so that it classes either as basic research, applied research or experimental development.
How much could the R&D Tax Credit increase be worth to me?
If you have an ongoing R&D project you are already claiming tax credits for, you will see a 5% increase in what you claim back in your next accounting period starting on or after 1st January 2026. So say you spend €100,000 on the project in that accounting period, you’ll be able to deduct €35,000 from profits before tax compared to €30,000 previously.
For high-value investments, there’s an even bigger change in what you can claim back during the first year of a new project. Revenue has always set an annual cap on the value of the R&D tax credit, spreading payback over three years in cases where the deductible amount exceeds that cap.
As recently as 2023, that cap was €25,000. But after a succession of increases, the first-year threshold is now €87,500. That means you can spend up to €250,000 on R&D projects and get the full credit in the first year.
If your spend is higher than that, you get €87,500 in the first year, then 60% of the balance in the second year, and the remainder in the third year. So say your qualifying expenditure on R&D is €500,000 in your next accounting period. At 35%, that gives you a credit of €175,000. You can deduct €87,500 from taxable profits that year. Then €52,500 in the second year. And the balance of €35,000 in the third year
To claim R&D Tax Credits, you may need to submit a pre-filing form to Revenue. You can find instructional videos on the filing procedure here. To discuss eligibility, get help with the claim process, and discuss the role of R&D credits in your tax strategy generally, get in touch with Xeinadin to speak to a tax specialist in your area.
