Reforming R&D Tax Credits
In this fourth (and final) post in my series covering the budget recommendations that I coordinated at StartupIreland, I’m talking about our recommendations for the R&D tax credits. Startup companies are R&D wunderkind, but they are avoiding this tax break due to the cost and uncertainty of accessing it. This means that scaled up tech companies (e.g., international IDA clients) are benefiting from this tax break, whereas younger home-grown tech companies (Enterprise Ireland clients) are not. We should level this playing field.
This is the final and fourth post in the series “#StartupIreland Pre-Budget Submissions 2015”
Recommendation: Single-installment R&D Tax Credits
Many high impact startup companies are innovating with new technologies and are eligible for the R&D Tax Credits. This credit is refunded in three annual installments following the accounting period in which the R&D work was performed.
A typical startup struggles with cashflow while it performs the research and development associated with its initial product. By the time that the startup can begin to benefit from R&D tax refunds, its cashflow difficulties will often have either disappeared, or have put it out of business.
Increase the survival rate of startups by permitting them to claim refunds against R&D Tax Credits in a single installment, during the same accounting period that the R&D expenditure was incurred.
Recommendation: Clarify R&D Guidelines for Software Development
A great many of Ireland’s high impact startups are engaged in the delivery of digital products and services. The core activity of most of these companies is software development, which is a highly experimental process. The current R&D guidelines are hard to interpret with respect to software development activities, resulting in many startups that avoid claiming the R&D tax credit when they may in fact be eligible, for fear of an expensive audit.
Launch a consultative process with Irish-based software startups to define clear guidelines on what software development activities constitute eligible R&D, and specify an acceptable level of supporting documentation that fits within the modern software development process.
That’s the end of this series on our budget recommendations. There were a couple of other recommendations that I didn’t include in this series because they were so simple. You can find these in the full submission, but I also want to mention them here for completeness:
- Parental leave. Simply: a mother should be able to share her maternity leave entitlements with her partner, so that she has more flexibility to return to work earlier, if she so wishes. This goes far beyond promoting startups - it’s about simple equality. Regardless of entrepreneurship, I’d like to live in a society that recognises that women have an equal entitlement to have a career.
- Offset defaulted convertible debt against CGT. Startups are increasingly raising early stage funding from private investors in the form of convertible debt. The benefit is that legal costs don’t end up costing you 10% of the money you raise. Unfortunately, this is a raw deal for the private investor - losses on convertible debt cannot be offset against capital gains (a loss on an equity investment would be a capital loss that could be offset). Permitting convertible debt to count as a capital loss would be a simple measure to give early-stage startup investment another much-needed shot in the arm.
We’ve received confirmation that our submission has been received by the Minister of Finance and will be considered. We have tried to ensure that every one of our recommendations is achievable, cheap, and impactful. We hope that the budget will strengthen Ireland’s homegrown technology industry by including as many of these recommendations as possible.
On October 14th, StartupIreland’s Eoin Costello and his advisory board (including yours truly) will be analysing the budget carefully, and we will put out updates from @startupireland on what we think has been achieved.