R&D Tax Compliance: What is the Accounting Test?

R&D tax credits can be a lifeline to some Irish companies, offering up to 30% back on qualifying project costs. But how do you know if your claim is submitted correctly?

In the event of an R&D Aspect Query from Revenue, companies need to prove that they meet the Science Test and the Accounting Test. The former ensures that your R&D activities qualify under Revenue’s definition and the latter is to confirm that the costs have been correctly claimed. Both tests form part of an enquiry into an R&D tax claim and are conducted by Revenue’s experts.

As the R&D tax credit scheme keeps up with international equivalents in terms of legislation, we may see that Revenue increases its scrutiny of claims in line with other schemes across the globe. With the R&D tax credit claims value surpassing the billion mark for the first time in 2022, it seems likely that Revenue will be keeping a closer eye on claimants to make sure they aren’t giving money away.

If we are to see more emphasis on compliance, claimants need to pre-emptively confirm that they pass both tests. Though they are officially part of Revenue’s examination into an R&D tax claim, they are a great way to confirm a project’s eligibility before making a claim.

The Science Test is covered here.

What is the Accounting Test?

The Accounting Test is part of how Revenue ensures that claims meet the qualification criteria. It’s a detailed examination into the costs claimed, performed by an expert from Revenue. It may also include a review of the methodologies in place for identifying qualifying costs and the calculations used to apportion expenditure.

Companies should be able to explain the allocation of resources and associated costs of each stage of a project. Details of the targets and deliverables aimed at resolving scientific or technological uncertainties should be clearly linked to the relevant accounting records.

Appropriate records, methodologies and costs claimed will vary between sectors and projects. Revenue doesn’t have a strict line for what is a reasonable methodology; a company will pass the Accounting Test if the allocation method is “bona fide, reasonable, and based on the facts of the individual claim”.

Though the Accounting Test forms part of an audit from Revenue, it is important to pass this test before making your claim. You won’t know for sure until Revenue investigates your claim (which in itself is not guaranteed), but you should make your claim with the criteria in mind, so you aren’t caught out on the back end.

What costs can be claimed?

R&D tax claims can include staff wages, materials, overheads, subcontractor payments, agency staff and payments to universities and institutes of higher education. Some other costs can be included, such as royalty payments, rental costs and cloud computing costs, so long as they are incurred “wholly and exclusively” for R&D.

The R&D must be carried out in Ireland, the European Economic Area (EEA) or the UK.

Grants and the Accounting Test

Despite grant-funded small and micro-sized companies being exempt from the Science Test (provided they meet certain criteria), they must still pass the Accounting Test for the claim to be valid.

Revenue will not challenge a small or micro-sized company on the eligibility of their R&D activities, since it is assumed that the Science Test is largely passed by the company receiving an R&D grant from Enterprise Ireland, Horizon 2020, Horizon Europe or IDA.

However, the allocation of costs is unrelated to the R&D grant, therefore Revenue reserves the right to investigate the cost and tax treatment applied by the company.

Grant-funded companies must therefore retain all relevant records and ensure that they correctly claim for their R&D activities.

What records are required to pass the Accounting Test?

As part of Revenue’s audit, they may ask to see evidence of the costs claimed and the methodologies used to allocate costs. Fortunately, Revenue has provided a list of the kinds of records that may be required:

• R&D project dates (more information can be found here)
• A project plan with milestones and deliverables, and progress made against the plan
• Personnel involved in the project and their qualifications
• The amount of personnel time allocated to the project
• The location where the R&D activities took place
• A breakdown of costs associated with the location (e.g. apportionment of light, heat, etc.)
• Amounts paid to universities or institutes of higher education and the R&D activity carried out by them
• Amounts paid to subcontractors and the R&D activity carried out by them
• The methods of apportionment of all expenditure associated with the R&D

Of course, you only need to provide the records relevant to your costs. If you haven’t got any subcontractor payments, then you don’t need to provide evidence of this.

The records should be contemporaneous (i.e., not filled in later) and reliable. They can be electronic or paper-based.

Each sector and, indeed, each company within the sector, will have different regulatory and record-keeping requirements. A pharmaceutical company will have very strict record-keeping requirements, for example. Revenue will accept records that are produced within a company’s own internal record-keeping procedures. However, it is crucial that some kind of systematic approach is implemented.

This evidence may already be part of your practice. If not, you should make an effort to see where project tracking documents can be introduced. This may include a series of questions at the commencement of any project, to determine if R&D is expected. Alternatively, you may implement monthly check-ins which review last month’s work and what new uncertainties may have arisen.

How can Myriad help?

Myriad boasts a team of dedicated specialists in R&D tax. We have experience in making claims from the micro to international scale and we know what’s needed to make a robust claim.

We offer a full consultancy service and an online guided portal, Tax Cloud, both of which offer best-in-class service and confirmation that your claim is as strong as it can be.

If you're looking to start your R&D tax claim, our R&D tax calculator can assess potential savings for your innovative project. For any specific questions, or to get started with our services, please contact us or call on 0207 118 6045.