Last week, we delineated the current risk issues associated with the R&D Tax Incentive (Incentive) as presented by AusIndustry and the ATO. Close to our heart were the concerns raised by the described incidents of poor practice by so-called R&D tax ‘consultants’.
The Incentive was designed with a number of goals in mind but the chief aim was to lower the effective cost of innovation relative to other business activities. The current number of company groups receiving assistance from the Federal Government has swelled to beyond 12,000 following the transition from the R&D Tax Concession (the Concession) to the Incentive in 2011. In the same time, there has been a rapid growth in the number of tax agents providing advice in this area including special purpose R&D tax agents. There has also been a number of consultants providing advice on the Incentive without the appropriate registration with the Tax Practitioners Board which is actionable behaviour.
It is increasingly apparent that the quality of advice in the marketplace is not keeping pace with the rapid growth in the number of participants nor with the program’s continuous evolution. The key regulators, the ATO and AusIndustry, conducted workshops a few years back to address the shortage of quality advice but these were shortlived. There has been a mushrooming of R&D tax agents charging “success fees” to register businesses for the Incentive, only to push back the brunt of administration onto company accountants and failing to undertake any accountability for the ultimate claims made.. Both the ATO and AusIndustry have recently released a number of warning notes about concerns regarding a number of advisory practices in the area.
One key problem relates to the fact that the requirements to be registered as an R&D tax agent do not directly assess the ability of the practitioner to provide advice in this highly specialised field. From a personal perspective, it was more relevant to my registration that I had done a law course on income tax law in the early 80s than the fact that I had been advising companies on the Concession for almost 25 years. As such, there are a myriad of ways in which R&D tax agents (and unregistered practitioners!) are working with companies in terms of R&D claim preparation and many of the approaches being taken are exposing companies to high levels of tax risk.
So what do I think you should be looking for in an R&D tax agent?
- A good R&D tax agent will ask you questions about your operation and how the specific technical aspects of your R&D program support your business strategy.
- They will have questions and advice about the way you are costing and tracking your R&D program with the emphasis on the identification and curation of contemporaneous financial documentation.
- When it comes to lodging the claim, they will apply the calculation rules correctly and provide the client with all necessary working papers.
- They are diligent about connecting the technical activities described in your registration application with contemporaneous technical documents.
- They are capable of assisting you in answering all relevant questions should the ATO or AusIndustry decide to risk assess your claims.
The Incentive is a generous program and, as such, it can attract advisers of questionable quality, particularly where companies are theoretically eligible for a cash payment. Many R&D tax agents currently practising are unable to demonstrate a competency in all of the five areas outlined above and are putting their clients’ claims at risk of repayments and penalties.
Participants should expect to be audited within two to three years of making an initial claim and the outcome of the Government’s risk assessment process depends largely upon the quality of service and advice you’ve received at the time the claim is being made.
The Incentive requires someone who can support you at every stage of the claim, from registration to lodgement right through to assessment.
In my experience, most business owners appreciate their partnership with the Australian Government via the Incentive in growing their business and making it future-ready. They want to present an open book. Your R&D tax agent must also be an open book. There is no substitute for transparency in the making of sustainable and defendable R&D tax claims.