R&D Tax Compliance: What is the Science 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 you qualify?

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.

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 Accounting Test is covered here.

What is the Science Test?

The Science Test is how Revenue ensures that a claim under inspection qualifies in terms of the activities claimed. Within this test, a technical expert appointed by Revenue will review the work done by the company in an on-site visit. This involves discussion with the project technical leads and a review of the evidence of the work.

Revenue may bring in an independent expert at the beginning of a review, but sometimes an expert will only be needed at a later stage if the company and Revenue can’t come to an agreement.

The project leads will need to present a robust case for how the projects meet the qualifying criteria and back this up with contemporaneous evidence.

The key questions you need to answer are:

• What is the advance in the overall knowledge or capability in the field of science or technology?
• What is the scientific or technological uncertainty involved in trying to achieve this advance?

How do I know if I qualify?

R&D is defined as systematic, investigative or experimental activity to overcome uncertainty and advance the field of science or technology.

Of course, the legislation has more criteria than just the above. Projects need to be in an eligible field of science or technology (which basically excludes the social sciences, arts and humanities). They must also be an eligible type of research.

Advance in science or technology

An advance in science or technology is one of the key indicators of eligible R&D. It involves developing new or improving upon the existing knowledge, understanding and capabilities of a field. This may sound vague, and it’s meant to, as R&D can happen in nearly any field.

It’s relatively easy to identify an advance in research contexts; just look for the innovation grant funding. However, when a company is looking for a competitive advantage, it will sometimes develop new capabilities within the field. A technological advance may not have been the main goal, but it was crucial for you to complete your project.

However, Revenue is clear that the advance must be in the wider field, and not just in your company’s own knowledge. This means that a company bringing itself up to speed with the wider field can’t claim for this, even if it is a significant improvement internally.

For example, Company A slightly adapts an existing software tool for use in its own product, which makes a huge improvement. However, since the technology already existed and has not been materially improved, Company A cannot claim for this work. There is no advance to the wider field.

Some claimants will confuse product development with R&D. Although product development may include R&D, it is not guaranteed that the work done will be an improvement to the state of the art. Not all innovation is R&D.

Importantly, if the information about how to achieve this advance is already available in the public domain, then the work done isn’t R&D. However, if an advance has already been achieved, but the method is not in the public domain (for example, it is a trade secret or it has not been published), then R&D may still occur.

For example, Company B is trying to develop an electric motor for lorries. Other companies have achieved this before, but the specifics of how they have done it are not available. Therefore, the work that Company B does is an advance in the field as there is no information in the public domain about how to achieve this goal.

Scientific or technological uncertainty

An R&D project must also try to resolve “scientific or technological uncertainty” to qualify. This basically means that the solution must be hard to work out. Your company should be taking on a risk trying to find a solution and there shouldn’t be any guarantee that you’ll find the answer.

There are two instances where uncertainty arises:

• Whether a goal can be achieved
• Whether an alternative method can achieve the goal in a better way (cost, reliability, reproducibility…)

As with the advance, if the project leads can easily work out how to solve the problem, or if the solution is in the public domain (perhaps published, or available through online research), then the project won’t qualify.

In some cases, the difficulty won’t be solved by the company, and the project will be abandoned. One of the benefits of R&D tax credits is that these projects can still be claimed for. R&D still occurs, so long as the company is seeking to advance the state of the art and overcome the uncertainty.

It’s important to separate out business challenges from scientific and technological challenges. Commercial problems, including market research, aesthetic considerations, or legal challenges associated with patents, are not eligible.

For example, Company C begins a project to improve the moisture-wicking properties of its fabrics. However, it first conducts a customer survey as it is uncertain if customers will buy it. This activity is not directly related to improving the fabric’s properties and is only a commercial uncertainty, therefore cannot be included.

Grants and the Science Test

Small and micro enterprises with grant-funded projects can relax; Revenue agrees that the definition of R&D generally encompasses the work that is funded by Enterprise Ireland’s, Horizon 2020’s, Horizon Europe’s and IDA’s R&D grants.

This means that Revenue will not challenge the science test for projects where:

• an Enterprise Ireland, Horizon 2020, Horizon Europe or IDA R&D grant has been approved in respect of the R&D project
• the project is undertaken in a prescribed field of science or technology
• the company is a micro or small enterprise
• the total R&D credit claimed by the company for an accounting period is €50,000 or less

What records are required to pass the Science Test?

Revenue provides a full list of the records needed to pass the Science Test, which can be found below:

• A description of the R&D activities, the methods used and what the company sought to achieve by undertaking the activities
• The field of science and technology
• The scientific or technological advancement of the project
• The scientific or technological uncertainty of the project
• Evidence that the scientific or technological advance(s) sought had not already been achieved, nor easily resolved (such as a comprehensive literature review)
• Details of the systematic investigation, including
  • the hypothesis advanced
  • the experiments or investigations undertaken
  • documentary evidence of each major element
  • 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 to determine if the objectives were met
• the qualifications, skill and experience of the project manager
• the numbers, qualifications and skill levels of other personnel working on the project

Some of the requirements above are repetitive, but it’s all crucial for you to be able to prove your project is qualifying and receive your entitlement as soon as possible.

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.