In October 2025, Minister for Public Expenditure Jack Chambers published Budget 2026 which, among other things, announced changes to the R&D tax credit. These updates were welcomed by industry, especially the increase in the R&D tax credit rate.
However, a lesser discussed element of Budget 2026 was the promise of a review of Ireland’s flagship innovation support, the R&D tax credit. Well, the Department of Finance has just delivered on this promise and published a medium-term plan, the Research and Development Tax Credit and Innovation Compass, to make the R&D tax credit work for Ireland’s innovators.
What Changed with the R&D Tax Credit in Budget 2026?
There were three key changes to the R&D tax credit announced in Finance Act 2025:
· Rate increase to 35%: Credit rate raised from 30% to 35% to maintain competitiveness in global R&D investment.
· First-year payment threshold increased to €87,500: The first-year payment threshold raised from €75,000. This is in keeping with the rate change, allowing claims relating to up to €250,000 of qualifying expenditure to be paid in full in year one.
· Staff cost simplification: Where an employee spends at least 95% of their time on qualifying R&D, 100% of their salary can be treated as qualifying expenditure. This eliminates detailed timekeeping for R&D heavy staff. This provision will be kept under review to ensure it operates as intended.
What Changes Could Be Coming to the R&D Tax Credit?
With the rate increase announced at the tail end of 2025, we can’t expect any more good news on that front. The R&D Tax Credit Compass is explicit that no further increases are anticipated, especially when considering that recent statistics demonstrate the tax credit costs the Exchequer €1.4 billion annually.
Similarly, the accelerated payments are unlikely to change going forward: the three-year payment plan serves as a method to reduce the year one burden on the Exchequer and reduce the incentive for opportunistic fraudsters. Revenue will continue to monitor the effectiveness of these changes though.
But rate changes and accelerated payments aren’t the only ways to boost the R&D tax credit. The Compass also considered proposals from industry stakeholders regarding subcontracting, overheads, capital expenditure and more.
Subcontracting Proposals
Subcontracting rules were flagged as the most active area of stakeholder interest and as such, a formal 2026 review is underway.
The current limits are 15% of in-house R&D spend or €100,000, whichever is greater. These limits are applied separately to universities/institutes of higher education and unconnected third parties.
Many suggestions for broadening the scope of subcontractors in R&D tax claims were brought forward in Revenue’s consultation on the R&D tax credit:
· Many suggested raising or even removing the above caps.
· Some wanted research institutes and university hospitals to be eligible alongside universities.
· Redefining ‘subcontracted’ work and ‘in-house’ work was also proposed, to make it more generous to the claimant.
· Currently, subcontracted connected party costs are ineligible for tax relief. The consultation found many stakeholders consider this too restrictive, especially in comparison with equivalent international schemes. Some recommended creating a third eligible subcontracted cost category for connected parties, with caveats (e.g., geographic limitations or requiring the claimant to own any IP).
- It was proposed that PhD/postdoc sponsorship costs and STEM bursaries should be included as qualifying costs, where the studies relate to the R&D carried out by the claimant.
Redefining Qualifying Expenditure
The Compass outlined a plan to review the definition of R&D, including a review of the fields of science or technology that are eligible for R&D tax credits (which haven’t been updated in 20 years!).
Currently, companies can only claim for expenditure incurred “in the carrying on by it [the company] of research and development activities”. This leads to a very restrictive approach to claimable costs, as work that is indirectly essential for R&D is ineligible.
However, expanding the definition of R&D to include expenditure incurred “for the purposes of” research and development (as suggested by some stakeholders) opens the door to a vast increase in the cost to the Exchequer, as activities that would be carried out irrespective of R&D would creep into the definition.
Nonetheless, the Department of Finance will still look into it as part of their medium-term plan.
Overhead Costs
There is no defined methodology for apportioning any cost; for example, staff can be apportioned based on their timesheets, but also based on estimates.
When claiming R&D tax credits, companies will often include a proportion of their overhead costs. To do this, companies will take an apportionment method (e.g., staff time spent on R&D vs non-R&D) and apply that to overhead costs like heat and power.
Revenue’s guidance does have a list of non-qualifying overhead costs (“such as recruitment fees, insurance, travel, equipment repairs or maintenance, shipping, business entertainment, telephone, bank charges and interest”). Stakeholders have suggested that a similar list for qualifying R&D costs would be appreciated, but the Compass declared this impractical.
Nonetheless, the medium-term plan will include an investigation into a fixed percentage of wage costs being deemed overheads (as sometimes done with grant applications).
Capital Expenditure
Companies can claim for some of their capital expenditure, like buildings, plant and machinery, so long as they qualify for industrial building capital allowances. Regarding buildings, it must have at least 35% of its usage going towards R&D over four years to qualify.
Stakeholders have recommended a reduction of this threshold or shorten the window to make this cost category more accessible to claimants.
Unfortunately, the Compass found this to be a lower priority than other considerations raised in the consultation, so is unlikely to progress further in the medium term.
What Other Innovation Supports Are Being Considered?
The Programme for Government 2025 (“Securing Ireland’s Future”) includes a commitment to a new tax-based innovation incentive. The 2025 consultation reviewed this too and took proposals for a new incentive. These included:
· A new tax credit focussed on decarbonisation and green objectives, digital transformation, and/or experimental development.
· An investment tax credit related to software development, digital infrastructure and cybersecurity.
· Enhanced deductions for equipment meeting certain scientific standards.
· A new incentive to support further developmental activity after resolving a scientific or technological uncertainty.
Extending the R&D tax credit to include “innovation” was largely ruled out, as it would potentially double the cost of the R&D tax credit to the Exchequer.
The Knowledge Development Box, an extant Intellectual Property (IP) scheme in Ireland is currently in place up until accounting periods beginning 1 January 2027. It allows companies to claim a deduction equal to 50% of its profits generated from IP resulting from qualifying R&D activities. Before renewing it again, the Department of Finance will carry out a review of the incentive in 2026.
What Does This Mean for You?
The growth of the regime from €70 million claimed across 73 claimants in 2004 to €1.4 billion across 1,804 claimants in 2023 is a great indicator of Ireland’s strong R&D community. Even more encouraging is the increase in claimant numbers from 2022 to 2023 (especially with SMEs).
To ensure the scheme continues to meet the needs of the many innovative companies claiming, 2026 will be a year of intense review.
The Department of Finance will continue to monitor the success of recent changes and seek to align stakeholder proposals and international competitiveness with the need for reasonable cost control.
The topics for review laid out in the Compass will not impact your claim in the short-term, but it’s always good to know what direction the scheme is going towards to prepare your R&D strategy in kind.
Want to discuss your claim in more detail? Get in touch with Tax Cloud’s experts.
