How the Pharmaceutical & Medical Industry Can Claim R&D Tax Credits

Ireland is a global hub for the pharmaceutical and medical technology industries, contributing over €100 billion in annual exports from the sector. With 9 of the top 10 global pharmaceutical companies having operations in Ireland and over 450 medical technology companies, Ireland is a powerhouse in this sector.

The industry employs over 85,000 people, making it one of the largest employers in the country. The MedTech sector is highly innovative, with over 200 indigenous MedTech companies focusing on R&D and new product development. It should be no surprise that companies in this field are taking advantage of Revenue's R&D tax credit scheme.

Revenue’s R&D tax credit incentive is designed to encourage innovation in Irish companies. It provides a 30% tax credit for qualifying R&D expenditure, boosting cash flow or reducing your corporate tax bill.

The basic requirements for an eligible R&D project are:

• Overcoming scientific or technological uncertainty
• Seeking to achieve a scientific or technological advance
• Conducting systematic, investigative or experimental activities

These requirements are intentionally vague, to cater to projects across many fields.

However, it should not be a surprise that many activities in the pharmaceutical and medical development fields qualify for R&D tax credits.

For large companies with R&D teams, it should be obvious where the main areas of innovation are. The usual spots for R&D include:

• Drug discovery and development.
• Clinical trials and regulatory testing.
• Medical device innovation and manufacturing improvements.
• Biopharmaceutical process development.

However, you may find R&D in unexpected places, thanks to the vague qualifying criteria. Incremental innovation, like developing new dosages or testing drugs or devices for other applications, are equally valid. Even trialling new APIs or raw materials can be included, even if the efficacy of the drug remains the same. Scaling up production processes could also offer opportunities for eligible R&D, where companies can seek to change established processes without impacting results.

Similarly, the medical device industry offers other areas for R&D (beyond the obvious advancement of medical device technology):

• Optimising design, fabrication, and assembly parameters.
• Testing prototype moulds.
• Developing tools, jigs, and fixtures.
• Testing materials for required characteristics.

Record-keeping is an essential part for any R&D tax credit claim. Revenue is clear that comprehensive, contemporaneous records should be kept.

In the pharmaceutical and medical device industries, this is likely to already be part of your R&D process, due to the stringent regulatory demands of the industry:

“R&D activity in the pharmaceutical industry typically takes place over a multi-year time frame, is heavily regulated, and is monitored and recorded in a very systematic and methodical way.”

This is important in the event of an audit from Revenue so that you can defend your claim. However, it also means that you can track your projects when they’re happening and identify qualifying activities and costs early.

The kinds of records you may need are:

• Timesheets for staff
• Competitor analyses
• Results of a literature review or other evidence that the solution was not in the public domain
• Evidence of the systematic investigation, such as:
  • Technical specifications
  • Experiments and associated results
  • Project plans and logs
  • Milestone reports
• Staff qualifications and experience
• Internal communication discussing the projects

Many companies in this sector will be recipients of grant funding, whether domestic (like the Disruptive Technologies Innovation Fund from Enterprise Ireland) or international (like Horizon Europe’s EIC Accelerator).

Revenue considers that any project funded under an innovation grant is qualifying for R&D tax credits (although only the costs that are unfunded!). Claiming R&D tax credits on a grant-funded project is a tricky topic, but can give companies a comfortable safety net.

It’s also important to remember that the costs of materials used in R&D are eligible expenditure, provided the results are not later sold on. This may be the case for some pharmaceutical projects, where the results of your R&D are in a saleable condition. In such a case, the lower of the cost or the net realisable value of any remaining materials or products should be deducted.

For example:

Company A is developing a new drug. In carrying out Phase 3 trials, Company A spent €500,000 on raw materials for three full batches (as well as multiple unsuccessful batches). The company expects to be able to sell the three batches, which are worth €300,000. Therefore, Company A needs to deduct €300,000 from its €500,000 materials costs.

If you’re still not sure if your project qualifies, get in touch with the experts at Tax Cloud. As Ireland’s number one software solution for claiming R&D tax credits, we know a thing or two about qualifying projects. When you use Tax Cloud, you can be sure that your claim qualifies because all projects are reviewed and approved by our expert team.

Author Barrie Dowsett, ACMA, GCMA CEO, Tax Cloud