You might be doing genuine R&D, but if you label it wrong during an audit, your claim fails. To claim R&D tax credits, your company needs to meet Revenue’s definition of R&D. The definition of R&D is intentionally broad to enable as many Irish companies as possible to claim their benefit.
Every R&D project falls into one of three categories: basic research, applied research, or experimental development. When Revenue opens an aspect query or enquiry into your claim, they'll ask which category your work fits. Get it wrong, and you risk losing your credit entirely.
Why is your R&D category important?
During an audit, you need to provide details on your R&D activity. This includes project names, dates, advances sought, uncertainties overcome, and the category of R&D undertaken. Companies that can't clearly articulate their category often see their claims reduced or rejected.
These categories are:
- Basic research
- Applied research
- Experimental development
R&D tax credits are very lucrative and only getting more popular. As Revenue handle more claims, audits to ensure qualifying activity may increase in likelihood. Having a robust claim from the get-go is essential to accessing and retaining your tax credit.
Basic Research
Basic research means "experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge without a specific practical application in view."
This is pure, curiosity-driven research. You're investigating fundamental principles without thinking about how you'll commercialise the results. Universities and government research institutions do most of this work, though some pharmaceutical and advanced materials companies conduct basic research too.
It's largely supported by grant funding because there's no immediate commercial payoff.
For example:
Company A, an Irish biotech startup, studies how proteins fold at a molecular level. They're not developing a specific drug; they're trying to understand the fundamental mechanics of protein behavior. They conduct experiments to observe patterns in protein structures and identify new folding pathways.
This work doesn't have a practical application yet, but it advances the field of science. The knowledge they gain might eventually support drug development, but that's not the goal right now. This is basic research.
Basic research provides the foundational knowledge that applied research and practical innovations build on.
Applied Research
Applied research means "work undertaken in order to gain scientific or technical knowledge and directed towards a specific practical application."
You're taking the results of basic research and exploring how to use them for real-world problems. There's a clear practical goal, even if you haven't created a commercial product yet.
Larger companies with established R&D departments typically do this work. Think pharmaceutical companies developing new treatments. However, smaller companies may conduct elements of applied research within their projects, especially at early stages.
For example:
Company B, a pharmaceutical company in Cork, is developing a new drug to treat a specific type of cancer. They design chemical compounds to inhibit cancer cell growth, then run preclinical and clinical studies to test effectiveness.
They conduct laboratory experiments to screen potential drug candidates and use computational modeling to optimize the chemical structure. They're applying existing scientific knowledge about cancer biology to create a specific treatment.
This bridges the gap between theoretical knowledge and practical applications. Applied research leads to innovations that address real-world problems.
Experimental development
Experimental development means "work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto."
This is what most Irish SMEs do. You're building on existing knowledge to create something new or significantly improve something that exists. It involves systematic experimentation, prototyping, and testing.
You'll find experimental development in software development, manufacturing, food production, construction, and dozens of other industries. It's typically carried out by experts in the field who are solving specific technical problems.
Companies often take this on as part of their product development strategy, sometimes supported by grant funding but usually self-funded.
For example:
Company C, a manufacturing company in Galway, is developing the next generation of electric vehicle batteries. They want higher energy density, faster charging times, and longer lifespan than current market options.
They experiment with new electrode materials, design and fabricate prototype batteries, and run extensive testing to evaluate performance. When tests reveal issues, they refine the design and test again. This iteration is the hallmark of experimental development.
Companies carrying out experimental development are not discovering new laws of physics. They're applying existing knowledge to create a better product through rigorous experimentation.
The Three Categories of R&D
Basic research is purely exploratory. You're driven by curiosity and the desire to expand knowledge, not by commercial goals. There's no immediate application in mind.
Applied research is directed toward solving specific, practical problems. You're using knowledge from basic research to address real issues, aiming for outcomes that have direct applications in the real world.
Experimental development involves the practical application of research findings to develop new products or improve existing ones. You're creating prototypes, conducting trials, and testing to refine innovations before bringing them to market.
The three categories can overlap. A pharmaceutical company might conduct basic research on disease mechanisms, apply that research to identify drug targets, then experimentally develop the actual drug formulation. They bridge the gap between theoretical knowledge and commercialization.
For most Irish SMEs, experimental development is where you'll spend your time. You're not discovering fundamental scientific principles; you're solving technical problems to create better products, processes, or services.
Key takeaways
- Every R&D project must fit into basic research, applied research, or experimental development
- Most Irish SMEs conduct experimental development, like improving products, processes, or services through systematic experimentation
- Revenue will ask about your category during audits, so document your reasoning from the start
- Understanding these categories helps you position your claim correctly and defend it under scrutiny
Understanding these categories isn't just about ticking boxes on a form. It's about showing Revenue you know exactly what scientific or technical advance you're pursuing and how you're achieving it.
If you're unsure how your work fits into these categories, we can help you position your claim correctly. Tax Cloud enables you to write a full and robust technical report for your R&D tax claim, including all required information, like categories of R&D.
