It is interesting to note that the number of companies making R&D tax credit claims over the past 5 years has been steady; between 1,500 to 1,600 each year. However, when we compare the number of R&D tax credit claims to total population, we find that Ireland appears to have a low claim rate compared to other countries like UK, Netherlands, Canada and Australia.

For example, dividing the number of R&D tax credit claims by population in the UK gives rise to a ratio of .00076% (50,000/66M) compared to Ireland at .0003% (1,550/4.8M), less than half that of the UK. Similar results are seen when we compare these stats to those of Netherlands, France, Canada and the United States, countries that have stats closer to that of UK.

Based on our discussions with hundreds of accounting firms and businesses, we think there are two reasons why Irish companies that are eligible to claim, choose not to claim.

• The first reason is that they simply do not know if they qualify. In our conversations, many businesses say the rules are too vague and ambiguous;
• The second reason is that they have heard Revenue is harsh in their assessment of what constitutes R&D; therefore Revenue denies a large number of claims

On the second point, businesses are not wrong. Comparatively speaking, Revenue has a stricter audit assessment of R&D tax credit claims than most other countries. Audit rates are higher; selected time periods for audit are longer; and disallowed funds are greater (the average reduction per claim has been around €80K per year).

Conversely, the average SME earns approximately €116K per R&D tax credit claim, whereas a large size business earns €1.9M. These are much larger amounts than comparative countries.

So those companies that choose to make an R&D tax credit claim can earn lucrative financial returns.

One of the main problems with the system is that no support needs to be filed by a company with the corporate tax return when making an R&D tax credit claim. Therefore, the company must keep on hand sufficient contemporaneous documentation to support the claim should Revenue wish to audit at a later date. We believe this approach is setting up companies for failure. With over 30 years of experience in filing R&D tax credits, few companies have the process or discipline to keep contemporaneous documentation.

But here is the good news. RDP has developed an R&D tax credit process that requires only one person to record R&D activities and costs. The time commitment should be no more than half an hour per month.

Here are some of the best practices for documenting an R&D tax credit project:

1. Designate one person for maintaining documentation for all R&D projects;
2. Create a system. RDP’s Innovation Connection Program (ICP) is a methodology developed to record R&D activities throughout the project lifecycle;
3. Quarterly meetings and R&D questionnaires should identify qualifying R&D projects in 2 minutes;
4. To ensure all project activities and costs are claimed, a “maximizer checklist” should be utilized prior to claim submission;
5. A project description assessed against the R&D tax credit criteria along with a detailed cost summary should be submitted with the corporate tax return; and
6. If Revenue decides to audit a claim, mock reviews, coaching and outside assistance should be sought.

If you are wondering what might trigger an audit, here are few scenarios based on our 30 years’ plus experience with R&D tax credit claims:

No support is filed with the R&D tax credit claim

It is not mandatory that a company supply any additional information related to the R&D tax credit claim other than the total amount of eligible R&D expenditures. However, if this is all that is supplied, your chances of being selected for an audit increase significantly. Moreover, given that Revenue can go back up to 4 years, it is very difficult for a company to pull together the documentation or information they require on audit.

Support information is filed, but it doesn’t address the criteria to evaluate the claim

We have seen many types of support supplied, but which still resulted in an audit. For example, only a general summary of work done was supplied, which did not address the eligibility criteria. The wrong words were used to describe the R&D work such as “trial and error”, “optimization”, “complexity”, and “we had to learn about the technology”. This type of support and language can give Revenue the wrong impression.

Support was filed and the criteria was addressed, but not in accordance with the guidelines

One of the most difficult aspects of making an R&D claim is understanding the criteria and whether your project meets those criteria, especially those related to technological uncertainty. Technological uncertainty is the most important criteria and the least understood. Technological uncertainty separates an R&D eligible project from a routine development project.

For example, building a software database might be complex but there is often no technological uncertainty about building it. To identify a technological uncertainty, you need to start with looking at performance aspects you want to achieve. If you are building a software solution and your platform needs to integrate with client/customer systems that cannot be completed with existing tools/industry know-how and will require design-redesign-coding-revised coding etc., then that is a good indication there is technological uncertainty.

R&D tax credit claims can significantly improve a company’s cash flow and 80% of companies file a claim each year. If eligible, no business should pass on this tax incentive, it is an entitlement.

If done correctly, the process to develop and prepare an R&D tax credit claim should be simple, practical with little time commitment.

Contact us to find out how RDP Associates can advise you on your eligibility for R&D Tax Credits and on minimising your chances of getting audited by Revenue.