The Background
IRDG R&D Tax Credit Clinic 19 th January 2016 Radisson Blu, Dublin Airport
R&D Tax x Credit it Background 1,500 companies now claiming € 400m+ per annum 2004 75 Companies claim € 70.5m 2008 582 companies claim € 146m 2009 1,172 companies claim € 224m 2012 1,538 companies claim € 282m
2013 R&D Tax x Credit it Revie iew
2013 R&D Tax x Credit it Revie iew Revenue to move on research loophole as millions lost ( August 2013) “ The Revenue is stepping up audits…… after uncovering widespread misuse of tax credits for research and development .” “ Audits by the authority found tax credits were not being properly claimed in 26 out of 32 firms examined, resulting in € 6 million being returned to the exchequer .”
rd Se imes – 3 rd Ir Iris ish Tim September 2015 > € 14m back tax > € 21m back tax to date from from 200 audits audits started in started in 2013 2014
th Ja 12 th Ir Iris ish In Independent – 12 January 2016
R&D Tax x Credit it – Build ildin ing the cla laim im Do all activities meet Do activities meet the Science/Technology Test the definition of R&D definition of R&D Activities set out in Activities set out in S766 TCA 1997? S766 TCA 1997? Accounting/Tax Test Has only expenditure relating to these activities been included and treated correctly? R&D Tax Credit
The Science Test
R&D Activ ivities - Defin init ition Defined in S766 TCA 1997 as: Systematic, investigative or experimental activities in a field of science or technology, being one or more of the following – i) basic research, namely, experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge without a specific practical application in view, ii) applied research, namely, work undertaken in order to gain scientific or technical knowledge and directed towards a specific practical application, or iii) experimental development, namely, work undertaken which draws on scientific or technical knowledge or practical experience for the purpose of achieving technological advancement and which is directed at producing new, or improving existing, materials, products, devices, processes, systems or services including incremental improvements thereto: but activities will not be research and development activities unless they – (I) Seek to achieve scientific or technological advancement, and (II) Involve the resolution of scientific or technological uncertainty;
R&D Activ ivities - Defin init ition Frascati Manual 2015 – 5 Criteria for identifying R&D 1. Novel – aimed at new findings not already in use in the industry; 2. Creative – based on original, not obvious , concepts and hypotheses; 3. Uncertain – about final outcomes; 4. Systematic – planned and budgeted 5. Transferable and/or reproducible – lead to results that could be possibly reproduced
1. Scientific/Technological Advancement
1. . Scie ientif ific/Technological Advancement “The test relates to knowledge or capability reasonably available to the company or a competent professional working in the field” “ an advance in science or technology means an advance in the overall knowledge or capability in the field of science or technology (not an advance in the company’s own state of knowledge or capability alone ). ” “ where knowledge of an advance in science or technology is not reasonably available …… companies may not be disqualified from claiming the tax credit where they undertake activities seeking to independently achieve the same scientific or technological advancement ”
1. . Technological Advancement Technological Advancement = New Knowledge Technology is the practical application of scientific knowledge and principles. While technology can be represented in physical form (patents, procedures, design documents, manuals etc.) it is not a physical entity. It is the knowledge of how scientifically determined facts and principles are embodied in the material, device, product or process. Frascati Manual 2015 Experimental Development is systematic work, drawing on knowledge gained from research and practical experience and producing additional knowledge , which is directed to producing new products or processes or to improving existing products or processes
1. . Technological Advancement What is the existing knowledge/capabilities? “Evidence that the scientific or technological advance(s) sought had not already been achieved and that the scientific and/ or technological uncertainties … were not already resolved or that such resolution would not be available to a competent professional working in the field, for example, evidence that a comprehensive literature review to determine the current status of scientific or technological knowledge in the area had been conducted prior to commencing the project. ”
1. . Technological Advancement Step 2. Specify Objectives – preferably quantifiable, always verifiable - How will you know if your R&D is a success? “ indicators or measures identified at the commencement of the project to determine if the scientific or technological objectives of the R&D activities are met ” . “ alterations of a cosmetic or stylistic nature to existing products, services or processes whether or not these alterations represent some improvement ”.
2. Scientific/Technological Uncertainties
2. . Scie ientif ific/Technological Uncertainty • A company should be able to support: 1) The presence of technological uncertainties at the outset of the project; and 2) That the technological uncertainties could not be resolved through routine engineering/standard practice • Identify and document the technological uncertainties at the outset “This arises in two situations, viz. a. Uncertainty as to whether a particular goal can be achieved, or b. Uncertainty (from a scientific or technological perspective) in relation to alternative methods that will meet desired specifications such as cost, reliability or reproducibility. ” • The Knowledge Gap
R&D Activ ivities – System Uncertaintie ies System Uncertainties creates unpredictable upstream or downstream effect on other components Architecture Alternatives Power Requirements Spacing Issues for Electrical Noise Motor and Drive Selection
3. Systematic Investigative or Experimental Activities
Systematic In Investigative or Exp xperimental Activ ivit ities • For Revenue, Systematic = Documented “ It is important that claimants realise the importance of contemporaneous and relevant documentation to support the claim. Failure to keep such documentation may result in the claim for the R&D tax credit being disallowed. ” “ Details of the systematic investigation, including • the hypothesis advanced. • the series of experiments or investigations undertaken to test the hypothesis. • documentary evidence of the necessity for each major element and how it fits into the project as a whole. • dated documents of the original scientific or technological goals, the progress of the work, how it was carried out and the conclusions. • indicators or measures identified at the commencement of the project to determine if the scientific or technological objectives of the R&D activities are met .”
Scie ientific ic Method V Engin ineering Method Scientific Method Engineering Method State your question Define the problem Do background research Do background research Formulate hypothesis, identify variables Propose alternative solutions; choose the best candidate and build a prototype Design experiment, establish procedure Design experiment, establish procedure Test your hypothesis by doing an experiment Test your prototype by doing an experiment Analyse results and draw conclusions Test and redesign as necessary Communicate results Communicate results
Systematic In Investigative or Exp xperimental Activ ivit ities For the tax credit R&D is the journey, not the destination! “It is important that the claimant is able to provide records and details of the activities carried on, not just the outcomes .” “Where a particular path has not been successful and a different path required, then documentation to support these decisions should be available if needed”
R&D Tax x Credit it – Support Your Cla laim im Examples of Supporting Documentation • Project planning documents; • Records of resources allocated and timesheets; • Status and/or progress reports; • Design of experiments, feasibility plans with details of the methodology adopted; • Sprint/scrum reports; • Minutes of project meetings; • Whiteboard drawings proposed solutions; • Photographs & Videos of unsuccessful prototypes; • Test protocols, data, analysis, results, conclusions; • Proof of concepts, samples, prototypes with notes on technical challenges to overcome; • Emails or data extracted from a dedicated project management software system; • Records from specific team collaboration software packages
4. R&D Tax Credit and Software Development
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