Budget 2027: R&D and innovation

Budget 2027 - R&D tax changes

Paddy Stapleton, RSM Tax Partner, outlines the key changes to the R&D regime in Budget 2027 and what this means for businesses. 

Ireland's R&D tax credit regime remains one of the most attractive innovation incentives internationally. With a 35% credit rate that is fully refundable, the regime compares favourably with many competing jurisdictions and continues to play a significant role in investment decisions by multinational companies considering where to locate R&D activities. Equally, the credit is an important support for Irish SMEs and middle-market businesses, helping them fund innovation, develop new products and services, and scale their operations.

Budget 2027 introduces several welcome enhancements aimed at making the regime more flexible, accessible and effective. 

We examine the key changes announced on 6 October 2026 below. Subject to the enactment of Finance Bill 2027, the measures are expected to take effect from 1 January 2027.

1. 5% increase in the qualifying cost base

One of the most significant changes announced is the 5% increase in the qualifying cost base for the R&D tax credit. This increase will be available “subject to the company having incurred a sufficient level of expenditure”. Clarification is needed on this key condition and should become available in the coming weeks.  

While further details are needed, this change is welcome, recognising that companies incur additional indirect supporting costs that are not within the definition of qualifying R&D expenditure.

2. Improvements to outsourcing rules

Perhaps the most welcome reform is the expansion of the subcontracting provisions.

As noted in the briefing issued by the Department of Finance, the R&D tax credit is primarily available for qualifying R&D activities carried on by the company itself, but there are two provisions allowing the credit to be claimed on subcontracted activities where outsourced to:  

• third level institutions in the EEA, or  
• other unconnected third parties worldwide.

Budget 2027 increases the limits on qualifying outsourced R&D expenditure to third-level institutions and third parties from 15% to 20% and from €100,000 to €200,000 respectively.

Historically, the subcontracting restrictions have been a weakness of the Irish regime. They reflected a traditional view that R&D activities are carried out primarily in-house. In practice, modern innovation is increasingly collaborative, with businesses frequently relying on specialist consultants, testing facilities, universities and other external experts to successfully deliver research projects.

The increased thresholds acknowledge the reality of how innovation is undertaken today and provide companies with greater flexibility to access the expertise required to advance complex projects. This change should be particularly beneficial for SMEs and growing businesses that may not possess all of the necessary technical capabilities internally, while also encouraging greater collaboration between industry and academia.

3. Improved cashflow for smaller claimants

The increase in the first-year payment threshold from €87,500 to €105,000 will provide additional cashflow support for companies undertaking qualifying R&D activities.

Access to funding remains critical for many innovative businesses, particularly those investing heavily in growth. Increasing the amount of credit that can be received in the first year improves the immediate cashflow benefit of the regime and enables businesses to reinvest more quickly in future innovation projects.

For smaller claimants, this measure should enhance the practical value and accessibility of the credit.

4. Boost for the life science industry - simplification for clinical trials

The life sciences industry is a net winner from the Budget 2027 package of measures.

The proposal to recognise regulated clinical trials as satisfying the science test should significantly reduce administrative burdens and provide greater certainty when preparing R&D tax credit claims.

Companies operating within regulated clinical trial frameworks are already subject to rigorous scientific and regulatory requirements. Recognising this as evidence of qualifying scientific activity is a practical and sensible measure that reduces unnecessary duplication and simplifies the claim process.

This enhancement is particularly important for companies participating in global clinical trial programmes from Ireland. Given the uncertainty experienced by the sector in recent years, greater certainty and reduced compliance burden should further enhance Ireland's attractiveness as a location for life sciences research and development activities.

It is noted that this measure will be provided for at Committee Stage of the Finance Bill as technical work is ongoing on development of the relevant legislation.

5. Simplification of preliminary tax treatment

The Government has also announced measures to simplify the interaction between the R&D tax credit and the preliminary tax system, to improve the recognition of the R&D tax credit for the purposes of preliminary corporation tax.

While further details are awaited, this will provide a cashflow benefit to companies where the credit is offset against tax liabilities.

RSM's view

The R&D changes announced in Budget 2027 should make the tax credit more flexible, accessible and effective, while strengthening Ireland's position as a leading location for innovation and R&D investment.

• Positive increase in cost base; The 5% increase in the qualifying cost base will mean additional innovation support for all companies accessing the regime, while the enhancements to outsourced expenditure address a long-standing limitation of the relief and recognise the collaborative nature of modern innovation, where businesses increasingly rely on specialist external expertise to support research and development activities.
• Clinical trials' simplification; The measures relating to regulated clinical trials are particularly welcome for the life sciences sector. By reducing administrative burdens and providing greater certainty, the changes should enhance Ireland's attractiveness as a location for companies undertaking clinical research as part of global development programmes. This is particularly important given the uncertainty experienced by the sector over the past 18 months arising from changes in global trading conditions and tariff policies.
• Missed opportunity to support AI investment; that Budget 2027 did not include broader supports for businesses investing in AI adoption and other emerging technologies. These investments may not always meet the criteria for R&D tax relief.  AI investment is increasingly critical to driving productivity, efficiency and innovation and should be a priority focus for government to support. A complementary incentive to support businesses in deploying AI at scale would have helped accelerate the next wave of business transformation and should remain a priority for Government.

However, while there remains scope for broader supports around AI adoption and digital transformation, the overall package reinforces the Government's commitment to maintaining a competitive and internationally attractive innovation framework. For companies already claiming the credit, or considering making a claim, the changes announced should deliver meaningful additional value while reducing the administrative burden associated with accessing the relief.
 

See the Government's Budget 2027 Tax Policy Measures here.

Get in touch if you have any queries you might have in relation to Budget 2027.