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Research & development tax credit
Businesses in Ireland that are claiming the R&D tax credit have witnessed an increase in the level and intensity of Revenue inspection. This is true for owner-managed tech companies, as well as larger claimants. With Revenue audits on the increase and technical specialists in attendance, how should companies prepare and what is expected?
In Deloitte’s experience, it is common for claimant companies to misunderstand aspects of the scientific test, or worse, to fail to understand the qualifying criteria in the first place. For a company to qualify for R&D tax credits, the activities being claimed for must adhere to the following criteria, as set out in Revenue’s April 2015 guidelines:
- Activities must be systematic. That is, they must form part of a planned approach to achieve a specifically desired outcome. They must also be investigative or experimental in nature, and contemporaneous documentation related to the activities must be maintained
- Activities must be undertaken in a recognised field of science/technology
- A claimant’s activities must be either Basic Research, Applied Research or Experimental Development (Experimental Development is systematic work, drawing on existing knowledge gained from research and/or practical experience, that is directed to 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 doing so seek to resolve scientific uncertainty.
Many companies that are involved in technical activities, by virtue of the way they manage projects, costs and time, will feel that they meet the first three criteria. With regard to the last point, some useful questions to ask of your technical and scientific project leads are:
- Are your development teams pushing the boundaries beyond the normal expectations and capabilities of competent professionals within their field?
- Are the activities being carried out not only difficult, but require experimentation to deliver a successful result, perhaps with some failures along the way?
- Have you achieved an output of new knowledge in the field of science or technology within which your teams are working?
- Are the project activities being claimed evidenced by supporting documentation?
Each technical project that is undertaken by a company should be examined on its own merits to make a reasonable determination as to its eligibility for R&D tax credits. Without specific project information, it is very difficult to provide clarity as to what does and does not qualify but, in an attempt to provide an example that makes sense, let’s assume two scenarios: one high risk, (i.e. not likely to qualify) and one low risk, (i.e. likely to qualify). The examples shown are in the area of software development.
General application maintenance, such as updates, bug fixes, security and corrective maintenance and routine user interface development are operational development processes that generally utilise existing architectures and commonly known methodologies. These activities are regarded as non-qualifying activities in relation to resolving scientific uncertainty.
The same logic can be applied to the configuration of large and complex enterprise resource planning (ERP) applications, which can require substantial set up. Although this process can be complex, labour intensive, time consuming and expensive, it is Revenue’s opinion that these activities are generally not directed at attempting to resolve scientific uncertainty.
The development of new constructs like new architectures, complex mathematical algorithms, or new database-management techniques generally involves a high percentage of qualifying R&D activity. Often a process of experimentation is required to resolve scientific uncertainties. This process of experimentation is designed to evaluate alternatives that rely on a scientific approach.
The rules of the R&D tax credit are the same for all industries with regard to the eligibility or otherwise of the activities. Companies must realise that the R&D tax credit is complex, administratively burdensome and can very often be subjected to investigation by Revenue. It is vital that the technical/scientific criteria for inclusion are understood and analysed as part of the claim process. It is also crucially important for a company to be able to support its activities with contemporaneous evidence of the R&D investigations that took place over the claimed accounting period. A clear link must be drawn between the scientific activities and the financial costs being claimed.
Often, claimant companies treat the R&D tax credit in a retrospective manner, in which the information required to make the claim is assembled after the activities have been completed. Deloitte is assisting claimants to rethink their approach so that R&D is identified, flagged and measured while it is happening, in real time. This can save on opportunity costs later in the year by generating efficiencies for your valuable technical teams in the assessment and quantification of the R&D tax credit value.