Irish owned companies and R&D funding
The supports and incentives for privately owned business in Ireland are substantial and varied. The State supports research, development and innovation activities in Irish owned business through funding, training and collaborations involving numerous state bodies including; Enterprise Ireland, the Department of Agriculture, Food and the Marine, Local Enterprise Offices, Bord Bia, Teagasc, Universities and Science Foundation Ireland (SFI) amongst others. EU funding instruments like Horizon 2020 are also available and provide a substantial fund for Irish entities who are capable of becoming involved in Multi-Company and cross border collaborations. These are currently underutilised by Irish companies and are well worth looking into.
In contrast to the EU funding instruments that are available, Ireland’s globally competitive R&D tax credit regime is well subscribed. Interestingly, 180% of claimants are Irish owned entities and the majority of these are small and medium sized enterprises (SMEs), although the expenditure amounts attributable to Irish owned entities is low when compared to the 20% of foreign direct investment companies claiming substantial R&D tax credits for activities conducted here.
R&D tax credits are calculated at 25% of the expenditure incurred on “qualifying” R&D. This is claimed by businesses after they have incurred the expenses of the R&D undertaken. For activities to qualify, they must meet certain criteria which are set out in the legislation and further clarified through a set of guidelines. Claimants must adhere to the following criteria as set out in Revenue’s guidelines, circa April 2015:
- Activities must be systematic. That is to say, they must form part of a planned approach to achieve a specifically desired outcome. They must also be investigative or experimental in nature while maintaining contemporaneous documentation related to the activity
- Activities must be undertaken in a recognised field of science/technology
- A claimant’s activities must be either Basic, Applied or Experimental Development, (i.e. Experimental Development is systematic work, drawing on existing knowledge gained from research and/or practical experience, and is directed towards producing new materials, products or devices; installing new processes, systems and services; or improving substantially those already produced or installed)
- A claimant must seek to achieve a scientific advancement and in so doing seek to resolve scientific uncertainty.
In light of the above criteria, qualifying activities could potentially arise in many areas. The number of claimant companies has plateaued at about 1,500 and as such, most companies claiming credits have been doing so for some time. It should be expected then that they would have established systems and controls to assist them in pulling together accurate and robust claims. Yet, time and time again we encounter new clients who just get it wrong. Either they misunderstand the requirements for qualifying activities or their systems and controls are not sufficiently robust to produce a defensible claim should it be selected for audit. So what are the essential ingredients for a robust, defensible R&D tax credit claim? What is Revenue’s expectation coming into a technical audit and how can a claimant ensure that they are sufficiently prepared? Plan, define and document.
Plan – Qualifying R&D activities must be planned. Claimants must have clearly defined goals and the activities undertaken to achieve these must be measured. At the outset, documenting the aims of the R&D project, defining a hypothesis, and clearly showing how the company knows that R&D is required, is very beneficial. As the project progresses, records of the project planning and the R&D activities as they are undertaken, what scientific or technological uncertainties they are resolving and by whom, all assist in demonstrating that the work is systematic. That is to say, the output of the activities undertaken is planned, measured and documented as they happen. The work should neither be ad hoc or routine day-to-day, and it should be in a report format. Additionally, with the introduction of the Knowledge Development Box and the increased availability of EU RD&I funding, the necessity to have supporting information available for a number of benefits becomes greater. Well planned and accurately measured and documented R&D projects can mean that companies have one set of documents which supports various benefits.
Define - Understanding the base line at which current scientific/technical knowledge resides is vital if you are looking to create and subsequently demonstrate that you have achieved an advancement in that knowledge.
Fundamentally, the output of research and development activities is new knowledge. It is necessary for claimants to be able to demonstrate their understanding of the State of the Art (SOA) that existed prior to the beginning of the project. Literature reviews are an appropriate approach but, for experimental development, where scientific or technological uncertainties can be very specific, literature surveys may be an overly academic approach and may not provide any insight into the problems faced. As a result, these may not be beneficial for many companies to perform. Alternatives may include; documenting technology reviews which are often undertaken, and by being able to demonstrate that the company is abreast of the latest developments within the industry through records of conference attendance, competitor analysis and in the case of internally residing SOA, the limits to knowledge gained through previous R&D activities.
Document - In Revenue's Guidelines of April 2015, the requirement to have robust contemporaneous documentation has been emphasised. But what form should this take? Well, the documentation which is generated by the R&D activities is referred to as contemporaneous supporting documentation. As the name suggests this is documentation that is generated real time during R&D projects or activities which are the result or output of those specific R&D activities. State of the art assessment, specific measurements, evidence of incremental improvements, iterative incremental improvement measurements, experimentation results or investigative findings, project plans, documenting failures or goal reassessments. All of these can be classed as contemporaneous if they are maintained on a timely basis and dated. Records need to be kept and maintained continuously, and a demonstrable link to the applicable expenditures claimed needs to be evident. This is of vital importance and a clear link also needs to be demonstrated between the activities and the cost of undertaking those activities.
Ideally, timesheets should be maintained. At the very least a method of establishing who was on which activities, when and for how long should be maintained. For example, resource plans should be maintained showing which personnel were working on which projects (and not just qualifying R&D projects) and what proportion of their time is allocated to that plan. This becomes increasingly important where personnel have multiple responsibilities and work on several projects concurrently. It often comes down to the reasonableness of the evidence and of the assessor.
The risk of being selected for Revenue audit is substantial when claiming R&D tax credits. Demonstrating a clear understanding of the technical criteria, as well as showing how these expenditures are linked to the financial analysis, is of vital importance. With respect to Revenue audit interventions, a total of 178 were undertaken in 2015, yielding €13,542,000, or an average yield of €76,079. In 2016 a total of 276 interventions were undertaken, resulting in a yield of €13,714,000. From 2012-2015 audits averaged approximately 2% annually of the total amounts claimed in that year. Mistakes Revenue are still seeing relate to claims being made in the field of social science, inclusion of costs relating to quality control, cosmetic changes being made to products, and a lack of supporting documentation.
Where R&D activities are of good quality, claimant companies have good assessment methodologies and where documentation supporting the activities is generated contemporaneously, claimants should have no fear of a technical audit.