R&D Tax Credit and Innovation Compass

09 April 2026

Overview

The Department of Finance recently published its Research and Development Tax Credit and Innovation Compass, presenting a medium-term roadmap for Ireland’s R&D tax credit regime. The Compass notes that R&D-active companies employ nearly 253,000 people and contributed 44% of corporation tax liabilities in 2023, with the credit positioned as a major support in Ireland’s tax system. Amid global uncertainty and competition for R&D investment, the Government stresses that Ireland must remain proactive.

The Compass confirms the Government’s view that R&D is a vital contributor to economic growth, high-value jobs, and productivity, and thus deserving of active support. While the Compass does not contain a set of firm commitments, the document signals future direction, encouraging businesses to consider the roadmap to maximise support for innovation initiatives.

The document highlights four areas for expansion: qualifying expenditure, capital expenditure, administration and simplification, and innovation. These are all aimed at broadening access, increasing value, and paving the way for further support.

The current state of play

The Finance Act 2025 delivered the most significant package of enhancements in recent years:

• Increased benefit: The credit rate increases from 30% to 35% of qualifying expenditure. Together with one of the widest cost categories bases, including materials, plant, machinery and buildings, this makes the Irish scheme one of the most competitive among OECD countries.
• Faster payouts: The First-Year Payment Threshold (FYPT) is increased to €87,500, with claims up to this level paid in full in year one rather than deferred over three years. This provides an important cash-flow boost for early-stage projects.
• Simpler approach: Where at least 95% of an employee’s duties relate to qualifying R&D, 100% of their emoluments can now be treated as qualifying expenditure, reducing timesheet documentation burdens.

These are meaningful, immediate improvements. However, the Compass signals that more change is coming, indicating that businesses engaging proactively with the regime now will be best placed to benefit.

The four directions of the compass

Qualifying expenditure: The review is centred on expanding the scope of claimants and the range of qualifying costs, which could have significant implications for multinational groups. Currently, costs outsourced to third parties or universities are limited to 15% of in-house R&D spend or €100,000, whichever is greater. A formal review, launched in 2026, will assess whether these caps should be raised or eliminated altogether. Furthermore, activities subcontracted between connected or group entities currently do not qualify. Importantly, the Compass considers relaxing this constraint, albeit with safeguards.

The review will also investigate the possibility of broadening the definition of qualifying expenditure and will evaluate whether the fields of science and technology eligible for the credit remain suitable after two decades of technological progress.

Capital expenditure: The capital provisions are being examined with a view to making it easier for businesses to invest in dedicated R&D infrastructure. Currently, R&D credit is available on construction or refurbishment of buildings used for qualifying activity, provided that at least 35% of activity in that building relates to R&D across a four-year window. The Compass identifies both this threshold and the four-year timeframe as candidates for review. This is a medium-term priority behind the qualifying expenditure and administration workstreams, but relevant for any business planning significant capital investment in R&D facilities.

Administration and simplification: The focus here is on reducing friction and accelerating the financial benefit of the credit for claimant companies. Acceleration of the current three-instalment payment system (50% / 30% / 20% across three years) is under active consideration, as is a fixed overhead rate methodology that could replace the current bespoke “wholly and exclusively” cost analysis. This is a potentially significant simplification for SMEs. The credit will also be reviewed for alignment with the OECD’s new Pillar Two Qualifying Tax Incentive rules introduced in January 2026, important for multinational groups managing their effective tax rate under the global minimum tax framework.

Innovation and the Knowledge Development Box: Arguably the Compass’s most forward-thinking feature is its pledge to introduce a completely new tax-based support for innovation activities not currently covered by the R&D credit. The potential demand for such an incentive is considerable. According to CSO data, Irish enterprises spent a total of €11.2 billion on innovation in 2022, while R&D credit claims amounted to approximately €4.7 billion. This indicates that there is at least €6.5 billion of activity that could potentially be eligible if an incentive is designed effectively. The Knowledge Development Box (KDB), which offers an effective tax rate of 10% on qualifying IP income, will be reviewed alongside this initiative. Notably, the sunset clause, which means that KDB relief will not be available for any accounting period beginning after 1 January 2027, renders the outcome of the review particularly urgent for businesses currently benefitting from, or considering entry into, the regime.

What this means for your business

The Compass is a signpost rather than a guarantee of a changed direction. Nonetheless, this is a credible opportunity, and businesses that stand to gain the most will be those who engage in the review and proactively prepare rather than wait for legislative changes.

In the short term, this means ensuring your claims for accounting periods commencing on or after 1 January 2026 are thoroughly optimised to take full advantage of the new 35% rate. Employee time related to claims for the same period should be documented to benefit from the new 95% wage cost rule. Additionally, any sub-contracting arrangements should be carefully reviewed to identify eligible expenditure under both the current and anticipated regulations.

Looking further ahead, companies should be mapping their broader innovation spend now, understanding the gap between what qualifies today and the wider R&D and innovation activity the business undertakes, so they are positioned to move quickly when new supports are introduced.

How we can help

With expertise spanning both the technical and tax elements of R&D, we support businesses at every stage, from identifying and documenting qualifying activity alongside your technical teams, to preparing and defending claims with Revenue. If you would like to discuss what the Compass means for your business specifically, please get in touch.