The Importance of Compliance when claiming R&D Tax Relief

Introduction: 

R&D tax relief is a Government scheme created to incentivise businesses to invest in innovation by allowing them to claim back on eligible research and development projects, helping to fund advancements across sectors such as technology, manufacturing, engineering, and agriculture, among many others.

The Revenue Commissioners oversee R&D tax credits in Ireland; they ensure claims submitted meet the requirements for tax relief. To qualify, the main eligibility criteria must be met:  

• Does the business pay corporation tax in Ireland?

• Has the project sought to develop something new where previously there was no available solution?

• Did the company encounter scientific or technological uncertainty during the project and was the solution difficult to create?

Answering yes to these questions could make a company eligible for R&D tax relief in Ireland.

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‍RCK Ireland Claim Process: 

• Introductions – RCK consultants get to know the company and introduce the R&D scheme including project eligibility criteria and overview of qualifying cost categories. We also outline how the claim will be compiled and agree timeframes.  

• Technical project assessment – potentially qualifying projects are gathered and fully discussed to understand which projects are eligible. Evidence is also requested to demonstrate existence of R&D activity.  

• Financial analysis – the cost base is scrutinised for those costs incurred undertaking the R&D activity. Where possible contemporaneous evidence is acquired to support the allocation of expenditure to project milestones.  

• Submission and audit file – The R&D numbers are submitted within the company CT1 form by the company accountant. RCK prepares an R&D tax report that details the project activity and provides a breakdown of the cost analysis. This is reviewed by our internal compliance team and authorised by a senior officer of the client. The required evidence to substantiate the claim is held with the R&D report in an audit that is retained by RCK partners should Irish Revenue have queries.  

• For companies claiming that either haven’t submitted a claim before or not submitted a claim in the previous three years, the company will need to submit a ‘pre-filing notification’ form that is a high level description of projects. RCK prepares this and following authorisation by the company the form is then submitted to Irish Revenue.  

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Our Compliance Process: 

Compliance is fundamental in R&D tax credit claims, as not correctly following and applying appropriate tax legislation may result in erroneous or fraudulent claims being submitted. This is why it is essential for R&D tax relief providers to be incorporating compliance within their process.  

Our compliance team consists of individuals with legal and tax backgrounds who review these claims with a tax inspector mindset, and they will consider all of the questions that Revenue may ask, to create a robust claim and also have answers to these questions in advance.  Requests for more detailed information are common and can be answered directly with information gathered and retained in our audit file.

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Pitfalls to be aware of: 

These are some common pitfalls we see frequently when filing R&D tax relief claims.  

1. Incorrect classification of expenditure. The major categories of expenditure a company can claim include staff costs, consumables, software licenses and data costs, sub-contracting, capital expenditure, overheads and rental costs. A lack of understanding on what falls into these categories, or mistakenly categorising costs would be deemed illegitimate, and a claim would be investigated.  

2.Inclusion of non-qualifying costs would make a claim ineligible, these can include general admin, commercial or marketing activities.

3. Insufficient supporting evidence would make a claim non-compliant. If Revenue can’t see substantial evidence that R&D activities have been undertaken, the claim will be rejected.  

Despite a lot of innovative businesses being eligible for R&D tax relief, many will fall victim to these pitfalls, resulting in investigations, and sometimes even fines. Having compliance embedded within your claim process is a protective measure against this risk.  

RCK have formulated a claim process, in which compliance is embedded throughout. Our consultants peer-review claims to allow for a fresh perspective and different set of eyes. Each report is then passed over to the legal, data and compliance team who operate independently from the rest of the business and review each claim before submission to the Revenue. Following this, a subsequent discussion between compliance and the consultant who writes-up the claim takes place, and this back and forth between these 2 teams continues until the compliance team is satisfied that the report contains all of the information that the Revenue may need to make a decision on if the R&D tax relief will be granted. This is a protective measure to ensure your claim meets the criteria that has been set and should safeguard against the claim being rejected if Irish Revenue ask questions into the claim validity.  

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Revenue Interventions: RCK Process

Our compliance team also carry out revenue interventions reviews, for businesses who have already found their R&D claim under investigation by the Revenue.  

Usually, a Revenue intervention falls into one of three levels. Level one is insufficient supporting compliance; level two is challenging non-compliance and level three is high-risk cases. Most R&D cases fall into level one or two, which can usually be resolved through correspondence with Revenue, and the providing of further documentation, instead of the claim needing to undergo a full audit.    

The compliance team reviews Revenue’s request and compiles the requested information, ensuring it meets compliance criteria. During this collection of extra information, we make sure that our team can defend any investigation from Revenue in the following four-year review window.  

Fortunately, because a lot of these enquiries can be resolved through correspondence with Revenue, they are rarely escalated to appeals and penalties. Penalties will usually only apply if a company is found to be deliberately and knowingly submitting fraudulent claims - in which case repayments may also be subject to interest. Nevertheless, any delay or disturbance in your claim process can be disruptive, and it’s best to avoid this in the initial application.  

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The Importance of Compliance in R&D Tax Credits

In summary, compliance is essential when submitting R&D tax credit claims. Submitting a non-compliant R&D tax credit claim can lead to delays, withheld funding, and even fines which can be hugely costly and detrimental to your business.

It’s of highest importance that when you submit an R&D claim, you are doing so with trusted R&D experts with a robust and compliant R&D tax relief claim process.  

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