After you’ve submitted your R&D tax credit claim, there's a chance Revenue will open an audit into it at some point. It doesn't mean you've done anything wrong; it’s actually a normal part of submission, to ensure companies aren’t claiming without reason.
R&D tax credits are self-assessed, worth up to 35% of qualifying expenditure, and Revenue pays out well over a billion euro a year through the scheme. With that much at stake and very little supporting documentation required at filing stage, audits and random reviews are simply part of how the system stays accountable.
Audit or aspect query: which one are you dealing with?
Revenue has more than one way of checking an R&D claim. The lighter-touch version is an aspect query, a targeted letter asking for clarification or evidence on a specific part of your claim. It's classed as a non-audit intervention, and most companies that go through one resolve it by sending information they should already have on file.
A full audit of your tax affairs is a different matter. It's a more formal, wider-ranging review of your taxes claimed and your tax records, conducted under Revenue's audit code of practice. A full audit begins with a written notification from Revenue, giving you 21 days of advance notice of the audit date, the taxes and periods being examined, and what records you'll need to have ready. You will have the opportunity to make a disclosure.
An aspect query can escalate into an audit if your responses regarding your R&D claim raise further concerns, or Revenue may open an audit directly without an aspect query first. Either way, the process and the stakes with an audit are bigger.
Responding to an aspect query
Revenue may ask for details about one specific aspect of your claim (e.g., evidence of costs being paid in the period), or more broadly about the entire R&D tax claim.
An aspect query will usually come through as a message via Revenue’s portal. It will reference the specific aspects of the claim that need further clarity.
Aspect queries are an opportunity for you to demonstrate your R&D qualifies to Revenue, not necessarily a roadblock to claiming. You should answer their questions quickly and fully, providing detail and evidence where appropriate. We always recommend companies prepare a technical report alongside their submission, to pre-empt these questions and save you time and effort.
What does Revenue look for in an R&D tax claim?
Two tests sit at the heart of every R&D tax credit audit:
- The science test: does each project genuinely seek to achieve a scientific or technological advance, and does it involve resolving a scientific or technological uncertainty that wouldn't be readily solved by a competent professional in the field?
- The accounting test: are the costs claimed properly incurred on R&D activities, correctly calculated, and properly apportioned where staff or resources are shared between R&D and non-R&D work?
In practice, that means Revenue will want to see:
- A technical report for each qualifying project, covering the advance sought, the uncertainty involved, and the work carried out to address it
- Time records or other evidence linking individual staff to specific projects
- A full cost breakdown by employee, including salary, PRSI, and the basis for any time apportionment
- Records of subcontractor and third-party costs, with agreements and invoices
- Details of any grant funding received, and confirmation that grant-funded costs were excluded from the claim
- Workings for any amounts carried forward from previous claims
Revenue can audit a claim up to four years after the end of the relevant accounting period, or more if they suspect fraud or negligence, so this isn't only about your most recent claim. If you've claimed the credit consistently, older years can come into scope too. Companies are required to keep copies of records, books and other evidence for at least six years.
What are the possible outcomes?
Most audits end in one of a few ways:
- The claim is accepted as filed. If your technical reports and cost workings hold up, Revenue confirms the claim is correct and the query closes. This is the most common outcome for claims that were properly prepared and documented from the outset.
- The claim is adjusted. Revenue may accept that some projects or costs qualify but not others. Where this happens, you'll need to repay the portion of the credit relating to the disallowed amounts, plus interest on the overpayment from the date it was paid or offset.
- The claim is rejected. In more serious cases, Revenue may conclude that none of the projects claimed meet the science test, or that the cost basis is so flawed the whole claim falls. This is a significant financial outcome, particularly if multiple years are affected.
- Penalties may apply. Where Revenue considers that errors arose from carelessness or, in the worst cases, deliberate behaviour, penalties are added on top of the repayment and interest. The level of penalty depends on the category of behaviour and whether you made an unprompted or prompted disclosure before the audit began.
If you don't agree with Revenue's findings, you can try to reach a negotiated settlement, or you can appeal to the Tax Appeals Commission. Which route makes sense usually comes down to the value at stake and how confident you are in the technical and accounting position.
How to avoid an audit of your R&D tax credit claim
The single biggest factor in how an audit goes is whether the documentation already exists. Companies that prepare a full technical report for each project as the work happens, keep timesheets or a documented time apportionment method, and file subcontractor and grant paperwork as it arrives, generally find that an audit is a matter of handing over what they already have.
Companies that prepared their claim figures first and the supporting evidence later, if at all, are in a much harder position. Rebuilding a technical narrative for a project that finished over a year ago, possibly with staff who've since left, is difficult and the result tends to be thinner than a contemporaneous report would have been.
It's also worth having an adviser involved, either from the start of your claim or as soon as you're notified of an audit. Someone who's been through the process before can help you understand what Revenue is really asking, keep the response focused, and make sure nothing in your existing documentation is being read out of context.
Key takeaways
- An aspect query is narrower in scope and less formal than an audit, though the former can lead to the latter.
- Revenue assesses every claim against the science test and the accounting test. Your documentation needs to address both.
- Queries can reach back years, so older claims aren't necessarily out of scope.
- Outcomes range from full acceptance to full rejection, with adjustments, interest, and penalties possible depending on what's found.
- Contemporaneous documentation is the difference between a straightforward audit and a stressful one. Build your claim file as you go, not after the fact.
If you're facing an audit, or you'd like a second opinion on whether your claim documentation would hold up to one, get in touch and we'll talk through where you stand. You can also sign up to Tax Cloud to get your next claim built on solid foundations from the start.
