This year, the government has made recent changes to the R&D Tax Incentive Scheme application, making it impossible to complete the form without certain detailed evidence records. Therefore, it is mandatory to have several detailed documents in place as they form part of your claim application.
This leads us to believe that there is a clear intent to hone in on these records in upcoming audits.
What are the changes?
Fundamental changes to the application form are catching organisations out as they have not previously had to provide the level of detail now required. You are required to provide as part of your application:
- What was the hypothesis? (4,000 characters)
- What was the experiment, and how did it test the hypothesis? (4,000 characters)
- How did you evaluate or plan to evaluate results from your experiment? (4,000 characters)
- Describe your conclusions (4,000 characters)
- What new knowledge was this core activity intended to produce? (1,000 characters)
- Explain what sources were investigated, what information was found, and why a competent professional could not have known or determined the outcome in advance (1,000 characters)
The changes made by the Government mean that the evidence you have provided in the past may not be sufficient to defend your claim in the future.
The evidence requirements align with the R&D Tax legislation and are far more stringent than previous requirements. For example, you are now required to provide clear and detailed documented evidence around your hypothesis, the new knowledge you are seeking to discover and the experiments you will conduct to verify each hypothesis.
You must also provide follow-up evidence of the experiments, i.e. the outcomes that are assessed in terms of each hypothesis. You will also need to directly connect the expenses related to the appropriate Core and Supporting activity. The Core R&D and Supporting R&D expenses are both required for the claim application, rather than just the Project expense as per previous years.
Request for information on the rise
The Government are doing spot-checks of applications to ensure that the new requirements are met. If you are selected for a spot-check, you will receive a Request for Information (RFI) and must produce the additional requested documents within 30 days.
Another reason for a Request for Information is that the information in your application claim is found lacking, incomplete or of poor quality.
The Government may request any document related to your R&D program – from R&D project eligibility proof to the hypothesis and experiments conducted and the evidence of these recorded.
If you fail to locate the proper evidence or the information within the documents is not considered satisfactory, this will at a minimum flag you as “At-risk” or, worst case, trigger an audit.
If flagged as At-risk, the Government will notify the areas they are concerned about and advise you that you will be reassessed in 12 months, thus providing you time to review your records and processes to improve them before they come back for the audit.
Avoiding being flagged as At-risk or a full-blown audit
The Government provides specific “guidance” (link https://tinyurl.com/yec7n4dp) on what documents they deem necessary as evidence for your R&D application.
You need to cover the following areas in detail:
- Product strategy with project roadmap and new knowledge assessed
- R&D project documentation with project hypothesis explained
- R&D project eligibility proof for core R&D activity documentation
- R&D project timelines, plans and budgets that have been monitored.
- R&D work records that track time and materials as core and supporting
- Experiment plans to prove hypothesis documented*
- Experiments conducted and evidence recorded with the results evaluated/reported*
- Minutes of meetings to formally evaluate results, correct, and iterate on the hypothesis
The areas marked with an asterisk* need to use scientific language to describe your hypothesis, experiments conducted to test the hypothesis and capture the new knowledge you produce.
The best way to ensure you are capturing all of the correct information is to put in place templates that guide your team through the process of creating the proper documents that capture the right information in the right language and format.
Suppose you have already been flagged for a Request for Information. In that case, you may want to review what documents you have and apply templates before providing the information to avoid triggering a full-blown audit.
You may also be interested in either our Rapid Response RFI or Comprehensive Audit Preparation service to ensure your documentation is not found lacking. This service is designed specifically for businesses to remediate and align their program documentation to ensure that they can pass an AusIndustry audit and review.