By Brian Cookson
While the R&D tax credit program can be very beneficial to those companies that qualify for it, there are checks in place to ensure companies comply with the program. The program is one of self-assessment, which means you file an R&D tax credit claim based on your own assessment of your R&D projects. The claim is typically processed as filed unless you are selected for an audit.
Avoid Getting Audited
In the case of an audit, Revenue will typically want to review the entire claim. Basically, Revenue will:
- Assess the eligibility of each R&D project you claimed;
- Ensure the R&D activities and costs qualify and are reasonable;
- Review the technical and financial support, which you have to prove you did the work when you said you did the work
Revenue interventions for compliance with the qualification criteria for R&D tax credit claims have increased substantially, jumping by over 50% between 2015 & 2016. As the level of claims increases further, intervention levels by Revenue will also increase. The average claw-back from Revenue interventions on R&D claims in 2015 was nearly €80K. In addition, Revenue is not restricted to reviewing only the recent R&D tax credit claims; it can review claims that go back to prior years.
Here are key reasons that can cause you to be selected for an audit:
- No information
To claim R&D tax credits on your corporate tax return, you do not have to supply any support or description of the R&D work that you performed. However, this practice is not advisable. If you enter only one amount on the R&D tax credit form—the gross spend of your R&D—your claim could be suspected. Revenue can easily assume you do not have the back up to support the claim, therefore, you could be a suitable candidate for a claw-back. Companies that submit project descriptions for each of their R&D projects along with cost breakdown for each project and a list of documents, supporting evidence for their R&D, are much less likely to be audited by Revenue.
- You did not keep it technical
Too often, a business prepares a description of R&D projects, describes the business or operational challenge, but not the technical challenge. For example, companies discuss what the technology does or what problem it solves. This is really not of interest to Revenue other than context. The project descriptions should address the technological uncertainties that the business encountered and the advances made along the development journey by focusing on the systematic investigation of the issues encountered.
- Not addressing the criteria
If you are going to submit project descriptions, you should address all criteria. This will indicate to Revenue that you know the rules. Initially, you need to do R&D in a qualified field of science (namely “hard science” such as engineering, computer science, medical or agricultural sciences; social sciences like economics do not qualify). Secondly, over 90% of R&D claims fall into experimental development, which means you need to meet 3 criteria: technology advancement, technological uncertainty, and systematic investigation. These are described in great detail in Revenue’s guidelines but a good template can facilitate preparing the project description.
- Semantics: the wording is important
Something as innocuous as a project name can set the wrong tone with Revenue. For example, consider the two names for an R&D project; “AI next generation” vs “developing a bi-directional logic level conversion”. The second project name is technically descriptive and gets to the heart of the R&D being developed, as opposed to the first name which sounds highly generic and simple. The more technically descriptive your project description, the less likely you are to face an audit.
- Your R&D costs raise eyebrows
If your R&D claim has increased more than 25% from the prior year, you should explain why this is the case. Otherwise, Revenue could get suspicious and want to investigate it further. Your explanation for the increase should provide Revenue with the justification that sufficient R&D work was done to justify the costs.
Following these hints can help protect your R&D tax credit claim and prevent it from becoming reduced as a result of an audit. Having to pay back R&D tax credits is a painful process that many businesses should avoid. This can be accomplished through a properly prepared R&D tax credit claim.
If you believe your claim, (or if you are an accounting firm) your client’s R&D tax credit claims may be at risk of being audited by Revenue, contact the author at [email protected].
Brian Cookson is President and Managing Director at RDP Associates.