Proper record-keeping can make the difference between a successful R&D tax credit claim and a rejection letter from the tax authorities. Issues such as missing or insufficient records, a common problem for many companies, can be mitigated or eliminated with the right processes, approaches and partners.
BDO’s International R&D Centre of Excellence’s global network of R&D tax experts presents an overview of common R&D tax themes across jurisdictions, including best practices and how to mitigate documentation issues. BDO professionals from across the globe are here to support and guide you to make your record-keeping for R&D tax incentive claims as efficient and as streamlined as possible.
Why good R&D records matter
R&D tax incentives offer government support for companies to fund innovation and pursue growth opportunities. Incentives usually take the form of a corporation tax or employment tax reduction rules, and rates of relief can vary considerably in different countries. Similarly, reporting requirements differ from one country to another and are constantly evolving. For example, the US recently introduced new documentation requirements, effective January 10th, 2022, for refund credit claims.
A lack of understanding of these requirements can have wide-ranging consequences – from rejected claims and penalties levied by the tax authorities to deterring company decision-makers and finance directors from making a claim at all.
BDO’s International R&D Centre of Excellence has created the following guide to help taxpayers identify record-keeping best practices so that they can make the correct R&D claims efficiently to boost innovation funding in their businesses.
What types of records do companies need for R&D tax credits?
There are generally two groups of records or R&D documents that national tax authorities require:
Technical records: documents demonstrating areas like the precise R&D work undertaken, the investigative approach, and technical challenges faced. Some authorities (e.g., Germany and The Netherlands) review claims and records prior to approval. Others, including the USA, employ a self-assessment process where claims can be viewed as approved unless an enquiry finds otherwise.
- Financial records: documents supporting and detailing R&D work costs. A core aspect is the justification of the time spent by employees directly involved in the R&D work. Tax authorities require claimant companies to support estimates of time spent, most often through contemporaneous records such as timesheets. In some countries (e.g., France and Canada), documents such as timesheets are practically a legal requirement. In others, (e.g., the UK and USA), tax authorities may be more willing to accept estimates of time spent supported by analysis of employee activity, contribution, and responsibilities.
Due to the unique jurisdiction aspects, it is advisable to consult local experts if any doubts exist regarding what documentation requirements apply.
How to generate the necessary records
Generating the records needed to qualify for R&D tax credits may occur naturally through financial recording related to other tasks. However, this is not always the case, so some advance planning is important if you are planning to make R&D claims.
Finding ways to make the necessary record generation part of your normal practice and day-to-day operations connected with R&D projects is the best approach. This can be done by including systems such as:
- Maintaining a log of projects (this can be simple) and reviewing it with regular intervals (for example, every quarter)
- Time recording systems to document hours spent on specific projects
- Planning the R&D project activities in advance and identifying which systems will collect which data and where activity might go unmonitored.
This may seem like an administrative burden but it is important to remember that data generated through such initiatives can also be useful in many ways beyond R&D tax relief claims. As well as simple cost control benefits, one example is using such data to discover what projects see the best progress compared to invested hours and resources.
What to do if the necessary R&D records were not generated contemporaneously?
Of course, not all research projects are planned in detail from the outset, and companies may find that the records needed for R&D tax credit claims are incomplete or non-existent. However, there are ways to generate the necessary documentation retroactively. The situation differs from one jurisdiction to another. However, from BDO’s international experience, covering the following steps tends to produce optimal results:
Help to make R&D claims less work but more successful
Cutting through the uncertainties that may affect R&D tax credit claims and removing the sword of Damocles that hangs over management and finance directors unsure if R&D claims are valid requires a detailed understanding of documentation needs and the practical challenges for your business
BDO’s global network of experts can help remove that sword by working with companies to optimise their structure and processes for making R&D tax claims. With our on-the-ground presence in more than 160 countries, we offer locally embedded assistance and expertise no matter where you are – or wish to be – active.