Proper record-keeping can make the difference between a successful R&D tax credit claim and a rejection letter from the tax authorities. Issues such as missing or insufficient records, a common problem for many companies, can be mitigated or eliminated with the right processes, approaches and partners.
BDO’s International R&D Centre of Excellence’s global network of R&D tax experts presents an overview of common R&D tax themes across jurisdictions, including best practices and how to mitigate documentation issues. BDO professionals from across the globe are here to support and guide you to make your record-keeping for R&D tax incentive claims as efficient and as streamlined as possible.
Why good R&D records matter
R&D tax incentives offer government support for companies to fund innovation and pursue growth opportunities. Incentives usually take the form of a corporation tax or employment tax reduction rules, and rates of relief can vary considerably in different countries. Similarly, reporting requirements differ from one country to another and are constantly evolving. For example, the US recently introduced new documentation requirements, effective January 10th, 2022, for refund credit claims.
A lack of understanding of these requirements can have wide-ranging consequences – from rejected claims and penalties levied by the tax authorities to deterring company decision-makers and finance directors from making a claim at all.
BDO’s International R&D Centre of Excellence has created the following guide to help taxpayers identify record-keeping best practices so that they can make the correct R&D claims efficiently to boost innovation funding in their businesses.
What types of records do companies need for R&D tax credits?
There are generally two groups of records or R&D documents that national tax authorities require:
Technical records: documents demonstrating areas like the precise R&D work undertaken, the investigative approach, and technical challenges faced. Some authorities (e.g., Germany and The Netherlands) review claims and records prior to approval. Others, including the USA, employ a self-assessment process where claims can be viewed as approved unless an enquiry finds otherwise.
- Financial records: documents supporting and detailing R&D work costs. A core aspect is the justification of the time spent by employees directly involved in the R&D work. Tax authorities require claimant companies to support estimates of time spent, most often through contemporaneous records such as timesheets. In some countries (e.g., France and Canada), documents such as timesheets are practically a legal requirement. In others, (e.g., the UK and USA), tax authorities may be more willing to accept estimates of time spent supported by analysis of employee activity, contribution, and responsibilities.
Due to the unique jurisdiction aspects, it is advisable to consult local experts if any doubts exist regarding what documentation requirements apply.
How to generate the necessary records
Generating the records needed to qualify for R&D tax credits may occur naturally through financial recording related to other tasks. However, this is not always the case, so some advance planning is important if you are planning to make R&D claims.
Finding ways to make the necessary record generation part of your normal practice and day-to-day operations connected with R&D projects is the best approach. This can be done by including systems such as:
- Maintaining a log of projects (this can be simple) and reviewing it with regular intervals (for example, every quarter)
- Time recording systems to document hours spent on specific projects
- Planning the R&D project activities in advance and identifying which systems will collect which data and where activity might go unmonitored.
This may seem like an administrative burden but it is important to remember that data generated through such initiatives can also be useful in many ways beyond R&D tax relief claims. As well as simple cost control benefits, one example is using such data to discover what projects see the best progress compared to invested hours and resources.
What to do if the necessary R&D records were not generated contemporaneously?
Of course, not all research projects are planned in detail from the outset, and companies may find that the records needed for R&D tax credit claims are incomplete or non-existent. However, there are ways to generate the necessary documentation retroactively. The situation differs from one jurisdiction to another. However, from BDO’s international experience, covering the following steps tends to produce optimal results:
Help to make R&D claims less work but more successful
Cutting through the uncertainties that may affect R&D tax credit claims and removing the sword of Damocles that hangs over management and finance directors unsure if R&D claims are valid requires a detailed understanding of documentation needs and the practical challenges for your business
BDO’s global network of experts can help remove that sword by working with companies to optimise their structure and processes for making R&D tax claims. With our on-the-ground presence in more than 160 countries, we offer locally embedded assistance and expertise no matter where you are – or wish to be – active.
Country specific comments
Tracking and documentation on both the financial and technical sides are key to making a successful R&D tax credit claim in Ireland.
From a financial perspective, Irish Revenue services would expect to see good tracking and tracing of all costs relating to the R&D activities. While it is not a legislative requirement, it is extremely useful to maintain timesheet information for any personnel involved in the R&D activities. This is something that Revenue would typically request if a review of the claim were to be carried out.
Furthermore, the methods of apportionment and reasoning for the inclusion of both direct and indirect costs will likely be examined. Therefore, it is important that appropriate methodologies are adopted, and their rationale documented.
R&D documentation for tax credit claims in the US includes, but is not limited to, expenses documents, timesheets, including wage, contractor, supply, and computer expenses. Furthermore, documentation covering the qualitative nature of how each project meets the statutory requirements is required.
In cases where the necessary documentation may not exist, BDO can leverage data points and qualitative interviews to determine credit-eligible activity.
From a federal perspective, there is no specific record-keeping requirement for a timely filed R&D credit claim, other than that the taxpayer must retain records that are sufficient to substantiate the credit. However, state documentation requirements can vary from the federal requirements.
Companies must be aware of changes to legislation that may apply to their situation. For example, as of January 10, 2022, requests for refunds filed on an amended tax return need additional substantiation of the credits sought.
France’s R&D tax relief programmes are the Crédit d'Impôt Recherche (CIR) and the Le régime de la jeune entreprise innovante (J.E.I.) ou universitaire (J.E.U.). The schemes are come with comparatively strict documentation requirements but, in total, the reliefs offer the highest levels of tax subsidy for R&D expenditures.
Timesheets often form the basis of many required documentation processes. If timesheets are not readily available, companies often ask employees to do a simple breakdown of their time spent per project, including a breakdown per activity and rationale for how they have contributed.
France’s level of scrutiny of R&D claims is higher than many other nations and is especially high for any French company owned by a private overseas investor. In connection with M&A processes, investors should therefore pay extra attention to R&D and connected documentation levels.
Proper record-keeping for R&D, including for tax purposes, provides a wide range of potential benefits. From a financial rigour point-of-view, organisations stand to gain insights across many areas of their business operations. It is also true that the better your records are, the more likely it is that the outcome of R&D claim will be certain and timely.
However, only a minority of companies are strong where R&D tax credit documentation is concerned. For those without strong records, our advice is that some documentation is better than none and time invested in creating suitable records from the data that can be captured after the event is usually rewarded.
Even where there are good records, companies may still experience uncertainty concerning data requirements and how to pursue R&D claims. One example is an R&D projects’ boundaries. If the R&D aspects of a project run from March to September, while the overall project covers the whole tax year, for what period can the company claim credits? How to address situations like this to arrive at precise cost analysis that the UK authorities like is becoming increasingly important.
In Belgium, there are many national and regional measures supporting innovation and R&D, coming from different administrations. Therefore, it is vital to have a holistic and consistent approach to coordinate the various incentive claims.
A technical explanation must be available to ensure that R&D activities are eligible. However, a review by an independent engineering panel is not required.
With respect to applications for patent income deduction and the (partial) exemption of withholding taxes on wages of researchers, companies bear the burden of proof of costs associated with R&D activities. Ideally, costs should be tracked analytically in the accounts.
Issues can occur if, for example, technical teams make inaccurate assessments. In such instances, BDO’s experts organise meetings with the technical teams and carry out a joined-up analysis.
Timesheets are often pivotal in calculating R&D tax incentives eligibility. However, if timesheets are not available, BDO assists with analysing the responsibilities/role in the company of each staff member and allocating time to different activities contributing to the R&D projects.
Content adapted from BDO Global.