The guidelines provide a definition of the basic requirements for qualification in section 2.1 with criteria that the company must meet and conditions that the qualifying activities must satisfy, however the success of a claim is in the small print and whilst a company could have the next groundbreaking product, improper documentation or an inaccurate project write-up could disqualify the claim. The guidelines provide further clarity of the requirements for a valid claim in section 8 where they states that the claim must satisfy two essential tests – 8.1 The Science Test and 8.2 The Accounting Test.
Leaving aside the two main criteria of seeking to achieve scientific or technological advancement and involving the resolution of scientific or technological uncertainty, we are highlighting in this article some specific areas where companies struggle in their qualification from our experience.
Activities must be systematic, investigative or experimental activities. To demonstrate this it is important that the claimant is able to provide records and details of the activities carried on, not just the outcomes. Section 8.1 highlights specific areas that records are required to cover. When we visit companies they can often show us the actual final product, photographs of it in final testing, perhaps the User Requirements Specification but they do not have to hand details of the journey / story that the product went through from inception to the final product. This is often because it may be jotted notes in an engineer’s day book, lost sentences amongst email correspondence, or simply in an individual’s head.
For instance in the development of a product, during a first trial outcome A failed, so the company changed parameters W and X which then produced outcome B which still didn’t meet requirements, so the company went back to the drawing board and changed Y and Z and achieved the required outcome. For the claim, records would need to be produced to tell the journey / story of the systematic investigation:
- Dated drawing/code version 1 that had outcome A and data of the trial parameters and commentary on next steps in the development
- Dated drawing/code version 2 with the changed parameters W and X that achieved outcome B and an explanation of why/how they were changed and any associated technological uncertainties. This should include highlighting if say W was completely unsuccessful and therefore the concept scrapped and a different path required, or if it was carried on into the final design.
- Dated drawing/code version 3 with the changed parameters Y and Z that achieved the required outcome and an explanation of why/how they were changed and any associated technological uncertainties.
In addition to the above the company should also have a record of the hypothesis and measures to determine success identified at the commencement of the project. From our experience this is often something that is in an engineer’s head so it is good practice to encourage the team to start recording this when they start work on something new in an email which can be traced easily to the project. Braithwaite can provide guidance on how to set up processes for recording and tracking your project data.
Another area of concern for record keeping is around the dates of R&D activities. The latest guidelines have provided additional breakdown of records required to demonstrate this in section 8.2 Accounting Test. These specifically highlight the requirement for a) dates of commencement and termination of the project and b) a project plan with appropriate milestones and deliverables for management of the project. Often the R&D activities are part of a wider project and therefore it is possible to track the start and end dates for that delivery but possibly not for the R&D aspect within it; and any project plan would in all likelihood be for the wider project. Or the R&D activity may be the whole project and in the haste to complete it for a client deadline, project plans are the last things on the teams mind. Why do the Revenue require these dates? It is primarily to differentiate between R&D activity and commercial exploitation and ensure no costs from the latter are included in the claim. The Revenue does state that they are aware that different industries work and record information in different ways. Therefore it is possible to argue that if the systematic investigation is clearly detailed with dates, progress etc. the date information could be extracted to provide the information to satisfy this criteria.
Some final notes on record keeping for your R&D claim are that entries should be kept on a continuous basis not all completed at the end of a project and ideally should all be dated and identify the author/creator. Records should be kept for four years so put processes in place to avoid data being archived and lost.
Source: Revenue Ireland Research & Development Tax Credit Guidelines 2015
Braithwaite welcomes the opportunity to discuss any further questions you may have on whether your R&D activities could qualify.