Documenting R&D activities
When claiming the R&D tax credit, a company must be in a position to demonstrate that its claim can satisfy two essential tests, the accounting test and the science test, with records being maintained to satisfy both. Revenue Guidelines for Research and Development Tax Credit state:
It is important that claimants realise the importance of contemporaneous and relevant documentation to support the claim. Failure to keep such documentation may, in the event of an audit, result in a company not being able to support its claim. (1)
As the R&D tax credit is designed to incentivise the undertaking of R&D, rather than rewarding it after the fact, it is not sufficient to gather documentation retrospectively. Companies must plan for their R&D tax credit claim from the outset of the R&D activity, maintaining contemporaneous documentation on an “as-you-go” basis to support the resulting claim.
Doing this in practice, however, is not straightforward and the administrative burden often becomes a drain on staff resources; so much so that companies often opt not to claim the credit simply because the effort required to support the claim is perceived to outweigh the potential benefits. A 2013 Department of Finance survey found that 46% of companies undertaking R&D but not claiming the credit noted the level of administrative burden as one of the primary reasons for eschewing the incentive. (2)
Furthermore, some sectors may have different approaches to the production of documentation; a company in the pharmaceuticals sector, for example, would be much more likely to maintain extensive documentation of R&D activities as a matter of course than a company in the software sector.
It can often be difficult for companies to understand the nature of the documentation required. Revenue Guidelines state that the information required may be contained in:
- status and/or progress reports
- notebooks, lab reports, patents, and patent applications
- notes of problems encountered in the course of the project that identified areas of technological uncertainty and experimental development
- feasibility plan and/or outline methodology adopted
- files on personnel involved in the project. (1)
However, the nature and depth of information contained in the examples listed above can vary widely from company-to-company, so companies should cross-check their existing internal documentation to ensure it satisfies all of the elements set out in the legislation and Revenue Guidelines.
To assist companies in the documentation of R&D, KPMG has produced K-Doc, a tool designed to record R&D activities as they happen. K-Doc enables a company to contemporaneously document R&D activities on an “as you go” basis, while ensuring the information captured satisfies the requirements set out in Irish legislation and Revenue guidelines.
Click here for more information.
(1) Revenue Guidelines for Research and Development Tax Credit, December 2012.
(2) Department of Finance review of the R&D tax credit, October 2013