Finance (No. 2) Bill 2026 provides further clarity on the proposed enhancements to the Research and Development (R&D) Tax Credit and the Knowledge Development Box (KDB) regime announced in Budget 2027.
The changes are intended to improve cash-flow support, give companies more flexibility around outsourcing of R&D activity and simplify certain aspects relating to both the R&D tax credit accounting and science tests.
The threshold for payment of the first instalment of the R&D Tax Credit will increase from €87,500 to €105,000. This follows increases from €50,000 to €75,000 in Finance Act 2024 and from €75,000 to €87,500 in Finance Act 2025.
The change should be of most benefit to small and medium-sized enterprises and other businesses making smaller R&D claims. A company with a credit of €105,000 or less should receive the full value of the claim in the first year.
Companies with credits between €105,000 and €210,000 will also receive a greater proportion of their R&D Tax Credit claim up front.
By accelerating access to the credit, the measure should provide an additional cash-flow benefit and support businesses in funding ongoing and future R&D activities.
The limits applying to qualifying R&D payments to unconnected third parties and to third-level institutions will be increased. In both cases, the cap will move from the greater of 15% of a company’s non-outsourced R&D expenditure or €100,000 to the greater of 20% or €200,000.
The enhanced limits should give greater support to businesses accessing specialist facilities, technical capability or academic input, and support greater industry collaboration with third-level institutions.
Businesses should continue to identify outsourced expenditure and retain sufficient documentation demonstrating how the activities carried out by third parties relate to, and support, the company’s qualifying R&D projects.
Finance (No.2) Bill 2026 includes an additional 5% uplift for claimant companies for expenditure incurred in certain circumstances. In this regard, where a company incurs;
105% of the expenditure incurred on emoluments paid to employees engaged in R&D activities may be treated as qualifying R&D expenditure. The uplift will apply only where the non-qualifying R&D expenditure incurred by the company (i.e. (b) above) is at least 5% of the expenditure on emoluments paid to employees engaged in R&D activities (i.e. (a) above).
The measure recognises that research-intensive activity commonly generates related costs that do not themselves fall within the definition of qualifying R&D expenditure.
Businesses will still need to demonstrate that the relevant conditions have been satisfied. As such, payroll data, project records and the corporation tax treatment of supporting expenditure should therefore be carefully reviewed and maintained to support any claim.
Finance (No.2) Bill 2026 provides that, where a company elects to treat any R&D Tax Credit instalment as an overpayment of tax and that overpayment amount is offset against the claimant company’s corporation tax liability, such instalments can be taken into account for offset when calculating preliminary tax obligations.
This treatment previously applied to the first instalment of an R&D Tax Credit claim. The proposed amendment extends the measure to second and third instalments carried forward from earlier claim periods, allowing these amounts to be considered when calculating preliminary tax for a subsequent accounting period.
The amendments above shall apply to an accounting period whose specified return date falls on or after 23 September 2028, typically including companies with a 31 December 2027 year-end and later periods.
Budget 2027 also proposed simplifying the criteria for certain regulated clinical trial activities. The relevant legislation is not included in the published Bill because technical work is continuing, with an amendment expected at Committee Stage.
The Bill extends the Knowledge Development Box (KDB) regime for a further five years, so that it will apply to accounting periods commencing on or before 1 January 2032. This provides companies in Ireland that are developing qualifying intellectual property through R&D activity with an extended period to claim KDB relief.
The Bill also introduces a time-limited opportunity for an existing claimant to make an irrevocable election to exit the KDB regime in respect of all existing qualifying assets within a specified trade. The election may be made in relation to a single accounting period commencing on or after 1 January 2027 and before 1 January 2028 (the “specified accounting period”).
A company choosing to opt out must give written notification to Revenue within 24 months of the end of the specified accounting period . Once the election is made, the company cannot claim KDB relief again for the former specified trade or for the qualifying assets included within earlier KDB claims.
Where an opt-out election is made, any KDB losses relating to an accounting period arising before the “specified accounting period” will no longer be subject to the general loss relief or terminal loss relief provisions. As a result, unutilised KDB losses existing at the date of the election will effectively be lost.
Notwithstanding an election to exit the KDB regime, the company may claim KDB relief in a later accounting period for any new qualifying asset developed through R&D activity, which will be treated as a new specified trade for KDB purposes.
Given the potential impact on future relief claims and existing losses, any decision to opt out of KDB should be supported by modelling of expected income, carried-forward losses and the compliance requirements associated with KDB claim submissions.
The provisions above will take effect from the date of the passing of the Finance Act.
Separate amendments were also included in the Bill to clarify that KDB losses which may be carried forward and offset against a company’s non-KDB profits will be restricted on a value basis by reference to the KDB rate applicable when they are used.
This restriction will not apply where a company has made a valid election to exit the KDB regime. These amendments will apply to KDB losses utilised against profits arising in accounting periods commencing on or after 1 January 2027.
Finance (No. 2) Bill 2026 offers meaningful improvements for companies engaged in R&D in Ireland, particularly through earlier R&D Tax Credit payments, broader outsourcing limits and recognition of additional supporting costs incurred by companies.
The extension to the KDB regime also gives businesses greater certainty, while the option to exit the regime offers flexibility for existing claimants who may no longer receive a benefit from KDB due to evolution of the international tax regime (e.g. Pillar Two).
The overall direction is supportive and provides companies involved in R&D with positive enhancements to future R&D Tax Credit claims. That said, R&D incentives remain subject to detailed legislative and evidential requirements.
Companies should ensure that the frameworks supporting their claims remain robust and that sufficient contemporaneous documentation is maintained to support the positions adopted. Further details on clinical trials should also be monitored as the Bill progresses.
The measures unveiled in Finance (No.2) Bill 2026 will have far-reaching implications for businesses across Ireland. If you have any enquiries, comments, or wish to explore further, we are here to assist.
Contact Damien Flanagan of our Tax team today.
