Research and development (R&D) audit activity by the ATO is increasing as outlined in this year’s Federal budget, and here at Accru Harris Orchard, we’re increasingly aware of cases where businesses who have either incorrectly claimed R&D tax incentives or incorrectly applied the R&D tax provisions, are being targeted and possibly having to repay incentives previously claimed.
Recently an article in Accountants Daily highlighted a case where a large company, Airtasker, was requested to repay a figure in the millions as a result of claims subsequently rejected by the ATO. A few days later, professional services firm PwC slashed its R&D staff.
Businesses lodge R&D claims via their income tax returns – and to large extent, they self-assess their claim. The risk for the ATO and AusIndustry (a division of the Department of Industry, Innovation and Science) is that businesses overstate their R&D expenses and ultimately overclaim.
At Accru Harris Orchard, we have already performed some R&D audits for clients where the ATO initiated audit activity. The nature of the procedures performed are Agreed-Upon Procedures (AUP), where no opinion is expressed on the validity of the claim as such but reports factual findings from procedures prescribed by the ATO.
If a business is selected for audit, the business can choose to have the ATO perform the audit procedures or engage an independent auditor to complete them. We recommend engaging an independent auditor rather than engaging the ATO in order to ensure that a true, independent engagement is performed.
Depending on the nature of the findings, the ATO may choose to investigate the business’ claim further. For the audits we have performed, the ATO has accepted our findings. Generally speaking, R&D claims will be quite large – for our clients, the amounts were between $4m and $5m, so there was a bit of money at stake!
What if my business is selected for an audit?
If your business is selected for an R&D audit, we recommend the following:
- Engage an independent auditor to perform the AUP engagement. While there will be a cost for this, it will ensure the engagement is performed without bias. Our clients indicated that they were more comfortable appointing us rather than the ATO.
- Ask if the auditor has experience in performing these specific engagements.
- Understand that the auditor is not required to express an opinion on the validity of the claim, but only report factual findings – the procedures to be performed are prescribed by the ATO.
- Engage an R&D consultant to review your supporting documents prior to the audit. This will assist in identifying any possible issues/rectification of issues early on.
- Specific areas for review should include:
- Ensuring the R&D activities undertaken are consistent with the registered activities.
- If no advance or overseas findings have been obtained from AusIndustry, the appropriate documentation has been retained to support the nature of R&D activities, including all reports and correspondence from any external advisors engaged.
- Ensuring that determination and allocation of R&D expenses is appropriate, supported, and is not excluded expenditure as defined in the relevant provisions of the ITAA 1997.
- Ensuring that depreciation of R&D assets has been determined correctly.
- Seeing that adequate documentation is place for related party transactions (e.g. service agreements).
- Making sure tax returns have been completed accurately.
- Work with your auditor to provide them with the relevant background and nature of R&D activities undertaken to ensure they understand those activities. This will help them better understand the nature of expenses incurred/claimed.
- Be prepared that ATO activity may go back quite a few years (for our clients, this was back to the 2016 financial year. However, in the case of Airtasker the ATO went back to 2013).