Published by the Department of Finance on 16 February 2026, the Research and Development Tax Credit and Innovation Compass offer important insights into how the R&D Tax Credit regime has been enhanced over the years and the key areas under review that could prompt changes over the medium term.
For companies currently claiming, or considering claiming R&D tax relief in Ireland, the key takeaway is that the regime remains a central and well-supported feature of Ireland’s corporation tax framework, but it is also the subject of continued policy review.
Rather than setting out fixed commitments, the Compass identifies the areas the Government intends to examine further as analysis of the data on hand continues. This provides reassurance that the existing regime remains firmly supported, while also signalling that several important aspects of the scheme may be enhanced in the years ahead.
There are a number of proposed measures identified for further review in order to strengthen the R&D framework, which can be broadly grouped as follows:
Rate & Payment R&D Tax Credit
Ireland’s R&D tax credit has become steadily more generous and strategically important, with the headline rate iteratively rising from 20% at its introduction in 2004 to 35% under the Finance Act 2025, reflecting the State’s aim of maintaining Ireland’s competitiveness for global R&D investment while broadening support for smaller claimants and projects. Over the same period, the regime has expanded significantly, with Exchequer cost and claimant numbers growing from €70 million across 73 claimants in 2004 to €1.4 billion across 1,804 claimants in 2023. Alongside rate changes, the payment mechanism has also been restructured, with the Finance Act 2022 introducing a clearer three-year instalment model and a first-year payment threshold designed to accelerate cash flow for smaller claims, which has since risen to €87,500.
While stakeholders continue to advocate for faster repayment, the Government’s current position is that recent reforms should first be assessed through emerging data, particularly given the budgetary impact of acceleration and the need to manage fraud risk and protect the Exchequer.
Preliminary Tax
The Compass also highlighted the interaction between preliminary tax obligations and the revised R&D tax credit payment mechanism as an area requiring further consideration. While the credit is now generally paid in three annual instalments, companies must decide whether each instalment should be offset against tax liabilities or paid directly by Revenue. At present, only amounts from the first instalment that are offset against corporation tax may be reflected in preliminary tax calculations for the relevant and subsequent accounting periods, whereas the second and third instalments are excluded. Stakeholders have suggested that this treatment should be reviewed, including whether payable credits could also be recognised for preliminary tax purposes, although any such change would need to consider the increased Exchequer risk and its interaction with existing preliminary tax rules.
Wage cots
To help reduce the administrative complexity of R&D claims, Finance Act 2025 introduced a simplification to the treatment of employee wage costs. Specifically, following stakeholder feedback on the burden of maintaining detailed contemporaneous time records, particularly where employees spend almost all of their time on qualifying R&D activities, the updated provision now allows 100% of an employee’s emoluments to qualify where at least 95% of their duties relate to qualifying R&D. The measure is intended to ease record-keeping requirements, reduce disputes during Revenue audits, and provide greater certainty for both claimant companies and Revenue, while remaining subject to ongoing review to ensure it operates as intended.
Qualifying Expenditure
Qualifying expenditure is one of the main areas identified for further review. The Department intends to examine whether the current definition of qualifying expenditure remains appropriate, including what types of expenditure currently fall outside scope and whether there is a policy basis for expanding eligibility. The Compass also notes that the recognised fields of science and technology may need to be revisited to reflect developments over the past twenty years. This suggests that the scope of qualifying activity and expenditure may continue to evolve.
Sub-Contracting Provisions
Subcontracting is the most detailed review area the Compass highlights. Specifically, the Department has decided to conduct a holistic review of the existing rules for unconnected third parties, universities and institutes of higher education, and to consider the possible introduction of a connected-party category.
The Compass explains that, under the current regime, qualifying subcontracted costs are limited to 15% of the company’s own in-house R&D expenditure or €100,000, whichever is greater, and are also subject to the condition that the company must incur at least the same level of qualifying R&D expenditure itself. It also notes an important clarification regarding the geographical scope, stating that there is currently no geographical restriction on subcontracting to unconnected third parties, when historically the legislation has often been understood as implying that a subcontractor must be based in Ireland, the UK or the EEA.
Stakeholder proposals outlined in the Compass include increasing or removing the current 15% cap and €100,000 limit, removing the requirement to match subcontracted spend with in-house expenditure, broadening the definition of eligible academic bodies, and encouraging greater collaboration between industry and higher education. The Compass also notes proposals for a new category of connected-party subcontracting, potentially subject to conditions such as geographic limits, IP ownership requirements, and links to internal qualifying expenditure.
For companies that rely on external expertise, academic collaboration or group structures to undertake R&D, this is likely to remain one of the most important areas for future reform.
Capital Expenditure
The Compass also identifies capital expenditure as an area for medium-term review. In particular, it refers to a possible review of the current 35% de minimis usage test, the connection between the R&D Tax Credit and Capital Allowances for industrial buildings, as well as a reduction of the four-year usage test period. Although this is presented as a lower-priority expenditure than current spending, it remains relevant for businesses investing in laboratories, specialist facilities, or R&D-intensive operational sites.
Overhead Expenditure
Overhead expenditure is another area noted for further examination. Stakeholders proposed either clearer recognition of certain overhead costs or a fixed percentage approach linked to wage costs, notably a proposal to allow 20% of R&D wage expenditure to be treated as qualifying expenditure. The Compass does not adopt either position at this stage, but it does confirm that the fixed percentage model will be considered further, particularly as a possible simplification measure for smaller claimants. This work is expected to sit alongside the broader review of qualifying expenditure.
Innovation Supports
Beyond the R&D tax credit itself, the Compass signals continued work on a separate tax-based support for innovation. Stakeholder suggestions included support for digital transformation, decarbonisation, software, digital infrastructure and further development following qualifying R&D. However, the Compass makes clear that any such measure would require a clear definition, careful targeting, manageable administration and strong evidence of value added. The broad message is that future innovation support may emerge, but it is likely to be targeted rather than wide-ranging.
Knowledge Development Box
The Knowledge Development Box is also due for review in 2026. The Compass states that this review will take place alongside work on innovation support and will consider whether the regime should be extended or potentially integrated with any future innovation measure. While this is most relevant to companies generating income from qualifying intellectual property, it remains part of the wider policy direction for innovation-related tax supports.
What This Means for Claimant Companies
For claimant companies, the overall message is that the R&D tax credit remains strongly supported, but that the regime is also being actively refined. The Government is seeking to ensure that the relief remains competitive, targeted, administratively workable and fiscally sustainable. While no immediate further change to the headline rate is expected, a number of important technical areas remain under review and may shape the future direction of the scheme.
For businesses considering or preparing claims, the practical takeaway is that the current regime remains attractive and well supported, particularly following the recent enhancements. At the same time, companies should remain alert to future developments in qualifying expenditure, subcontracting, payment mechanics and innovation support, as these are the areas most likely to influence the regime in the years ahead.
Conclusion
Overall, the Compass provides reassurance that Ireland remains committed to supporting R&D through the tax system, while also indicating that further refinement of the regime is expected. For claimant companies, this points not to uncertainty, but to continued policy focus on ensuring that the scheme remains relevant, competitive and capable of supporting long term investment in high value research and development activity.
