The five things to remember if you're claiming R&D tax credits

Like the idea of R&D but think it's too expensive? There are tax credits available to soften any pain. Derek Henry, BDO R&D Tax Services Partner, writes for the Sunday Independent.


Research and development (R&D) expenditure by companies in Ireland topped €2bn in 2013 for the first time and is estimated to have grown further in 2014 according to a recent CSO statistical release.

With this continued increase in R&D expenditure by companies it is imperative that companies are aware of, and avail of, all support available to them.

One of the key supports available to reduce the cost of carrying on R&D is the R&D tax credit scheme. This scheme provides a 25pc credit on eligible expenditure to companies.

This credit can be used to offset corporation tax liabilities or, if there are no taxable profits, this can be repaid to companies in the form of a cash refund. These benefits make the R&D tax credit the most valuable corporate tax relief available, potentially reducing effective cost by up to 37.5pc.

So how do you make the most of it?

In claiming an R&D tax credit it is important to consider the following five key points to ensure a robust and audit ready claim is made:

1. Remember the deadline: Don't miss out

In order to make an R&D claim the claim must be filed within 12 months of the end of the accounting period within which the R&D costs were incurred. This is a red line date.

Once the 12 month window has passed there is no scope to make a claim or increase an existing claim. A simple tip would be to track your R&D activities and costs on a contemporaneous basis. You should also aim to review your potential R&D claim as early as possible after the accounting year end. This early review gives you the benefits of having prior accounting period activities fresh in the mind whilst also providing ample opportunity to address any issues or queries which may arise during the review process.

For efficiency little and often is best. Many of BDO's clients engage with us for shorter regular intervals throughout each claim period instead of just once a year post year end. This ensures that reporting of the activity happens in near real time and thus increases the quality of the activity detail maintained whilst significantly reduces the burden placed on the company in compiling a claim post year end.

2. Documentation, documentation, documentation

Documentation of your R&D can be a key value-add in many different ways; from the perspective of IP generation, business continuity and sound management practice. It is also essential with regard to your claim. In submitting any R&D tax credit claim (R&D claim) it is vital that companies maintain contemporaneous documentation in support of the claim.

Ideally, this documentation should include details of project planning, project tracking, and project time recording functions. Where possible, you should aim to align your internal documentation process with the documentation processes sought out by Revenue.

Why? Put simply, because Revenue can put greater reliance on such documentation. The requirement to have robust contemporaneous documentation has been emphasised by Revenue as recently as their published Research & Development Tax Credit Guidelines (updated April 2015).

Revenue have a four-year window from the time of submitting an R&D claim within which they can carry out an audit of claim, an audit which can consist of a review of a number of claims which have been made over the claim periods.

Given the potential for employee turnover within this audit window, we suggest that a summary report is maintained which sets out the basis for making the claim, the methodologies used in qualifying activities and associated costs, and detail of the activities which underpin the claim. You never know when you might need it.

The availability of a summary document can also be extremely beneficial in expediting an audit process and also can often act to mitigate the requirement for the Revenue to carry out an audit where this summary information is of a sufficient standard to address up front pre audit queries which Revenue may have.

3. Understand the science

R&D claims stand or fall based on the scientific and/or technical merits of the activities and projects that underpin the claim.

As such, I strongly believe that the R&D tax credit scheme is one area of tax where the R&D staff within your company are fundamentally important to ensuring that a valid tax credit claim is made.

An issue that we often encounter with clients is that internal R&D personnel do not understand what the key technical criteria are with respect to the R&D tax credit scheme. We also find that in situations where non-technical personnel - such as perhaps personnel from finance departments - are seeking to understand the merits of activities by reference to the key technical criteria, issues with disqualification of eligible activities or allowance of non-qualifying activities can occur.

Given these common issues we at BDO maintain a dedicated team of engineering and science qualified experts who are tasked solely with the identification of eligible R&D activities within companies by reference to the key technical criteria set out in the relevant legislation. If your advisors do not provide this, then ask them why not.

4. Promote collaboration: It's a team effort!

The compilation of an R&D tax credit claim requires a combination of scientific/ technical skills and finance/tax knowledge. Communication between and within both the finance and the R&D functions in terms of ownership and responsibilities is crucial.

It is important that clearly defined tasks are assigned to relevant individuals and it is imperative that claims are internally and / or externally reviewed prior to submission in order to ensure that all relevant technical and financial information is harmonious and accurate. When using external advisors to assist in this process we would suggest that the advisors team should reflect this cross functional capability also, as peer to peer discussions tend to be most effective.

5. Be aware of the evolving landscape

Between 2011 and 2015 Revenue have made a fundamental change in their interpretation of some key elements of the R&D tax credit scheme, with no legislative changes having been made in these areas in the interim.

As such, where companies wish to make a claim which is in line with Revenues current practice it is necessary to keep abreast of updates to the scheme and associated legislation.

You should endeavour to keep abreast of Revenues current approach to the auditing of the scheme. Auditing of R&D claims is carried out at the district level and we have found that there can be some level of inconsistency in how claims are audited by different districts.

As such, we would suggest that consultation with companies within your district, attendance at relevant seminars and consultation with expert advisors should help you ensure that your claims are robust and stand up to Revenue scrutiny.

If you follow these simple five tips, you should be able to make the most of your R&D credit claims.

Derek Henry is a tax partner and head of R&D tax services at BDO, leading a team of technical engineers and tax experts who assist clients in all aspects of R&D tax credit claims