The recent determination of the Tax Appeals Commission (“TAC”) in case 165TACD2025 (the “Determination”) provides an up-to-date insight into the application of some of the legislative requirements to avail of the research and development (“R&D”) tax credit in Ireland. The R&D tax credit is designed to stimulate investment in R&D activities by companies in Ireland and operates by giving taxpayers up to 30% of their R&D expenditure in the form of a tax credit or a cash refund subject to certain conditions being met.
The Determination is particularly interesting as it provides an in-depth discussion of some of the key criteria which must be fulfilled in order for a taxpayer to be entitled to the R&D tax credit, namely that :
- the R&D activities seek to achieve ‘technological advancement’;
- the R&D activities involve the resolution of ‘technological uncertainty’; and
- the expenditure is incurred ‘wholly and exclusively’ in the carrying on of the R&D activities.
Background
The Determination concerns an appeal by a taxpayer company (the “Taxpayer”) against a decision of the Irish Revenue Commissioners (“Revenue”) to deny the R&D tax credit for the Taxpayer’s expenditure on the development of a remotely accessible aggregated service desk hosted in the cloud on the grounds that: (i) the expenditure did not constitute qualifying expenditure for the purposes of the R&D tax credit because the activities did not seek to achieve technological advancement or solve technological uncertainty; and (ii) certain expenditure was not wholly and exclusively incurred on R&D. There was no dispute around the other criteria to be met in order that activities constitute qualifying R&D activities.
Technological Advancement and Uncertainty
(i) The R&D activities must seek to achieve scientific or technological advancement
On the question of whether the R&D sought to achieve technological advancement, the TAC found that the Taxpayer managed to leverage existing infrastructure to construct a scalable and secure system through which project management support services could be accessed by different customers at the same time remotely. Two Taxpayer witnesses confirmed that no aggregated service desk product hosted in an IaaS cloud computing platform such as this existed before the project commenced. The TAC accepted the view of the Taxpayer’s witnesses that this was no small achievement of software development and represented an advance on the knowledge available to a “competent professional working in the field”. This criterion was the appropriate test for technological advancement included in Revenue’s R&D tax credit published guidance at the time.
In cross examination, Revenue’s expert agreed that the Taxpayer’s project extended the “overall capability in the field of technology” but nevertheless appeared to suggest that this extension in capability was achieved without any sign of a technological advance having been necessary. However, the TAC rejected this view on the grounds that it did not believe that the witness gave sufficient weight to the fact that cloud computing was in a state of immaturity during the tax years in questions. As such, the TAC was satisfied that the Taxpayer’s R&D satisfied the test of achieving technological advancement.
(ii) The R&D activities must involve the resolution of scientific or technological uncertainty
On the question of whether the R&D resolved uncertainty, again, the evidence of the witnesses was critical. The TAC determined that the Taxpayer’s R&D did involve the resolution of technological uncertainty. This conclusion was largely based on the evidence of two of the Taxpayer’s witnesses who went into considerable detail in their evidence about the challenges the Taxpayer’s software developers faced in making the aggregated service desk. The TAC also put weight on an academic paper, which referenced challenges arising in respect of cloud-based applications, some of which the Taxpayer had resolved, that lent credibility to the Taxpayer’s position that its R&D resolved technological uncertainty.
Revenue’s expert was critical of the Taxpayer’s record-keeping which he said made it difficult if not impossible for him to determine whether there was a technological advance. Interestingly, while the TAC accepted that the Taxpayer could have kept better records, that did not preclude a successful claim. The TAC was satisfied that the Taxpayer had satisfied the evidential burden of proving that the creation of the aggregated service desk, which constituted a technological advancement, involved the resolution of questions of uncertainty.
Wholly and Exclusively Incurred
The second key issue addressed in the Determination was whether the Taxpayer’s expenditure was incurred ‘wholly and exclusively in the carrying on’ of qualifying R&D activities.
When analysing this issue, the TAC disallowed expenditure claimed for two employees involved in the R&D project on the basis that such expenditure did not satisfy the ‘wholly and exclusively’ test in the legislation. The disallowed expenditure related to the following employees’ activities:
- Employee 1 was the ‘project manager’ and a key part of her function was interacting with stakeholders including engagement with potential customers and promotion of the Taxpayer’s business. Whilst she was involved in giving structure and control to the R&D projects and carrying on desk-based research, based on the evidence before it, the TAC concluded that Employee 1 was not engaged wholly and exclusively in the R&D activities, but rather that her role was connected to commercial matters.
- Employee 2 was involved in providing knowledge of IT support processes and systems and feedback on what was built so that others on the software development team could carry out further experimental development on a new or improved process. However, he had no hands-on involvement in that experimental development work and the TAC concluded that he was not therefore engaged wholly and exclusively in the R&D activities.
Key Take Aways for Taxpayers
The Determination once again highlights that when conducting an R&D tax credit audit, Revenue thoroughly assesses whether an R&D project seeks to achieve advancement and solve uncertainty in its field. Taxpayers need to ensure that they have robust records and independent experts who are available to provide evidence to meet the evidential burden of demonstrating the advancement in the knowledge available to a “competent professional working in the field”.
The Determination also emphasises that in order to treat the cost of employees involved in R&D related activities as qualifying expenditure, it is critical that such employees are actively engaged in the relevant R&D activities and not merely overseeing or facilitating the relevant project.
In conclusion, whilst the R&D tax credit provides a valuable benefit for taxpayers, it remains under Revenue scrutiny and claims are commonly audited. It is important that companies plan ahead and prepare for such scrutiny when evaluating their R&D claims. Such planning should involve preparing and maintaining appropriate, contemporaneous documentation to evidence a valid claim and robustly defend taxpayers entitlement upon audit.