Although, there are numerous tax allowances and subvention to tenders available for research and development activities in our country; due to complex legislation and strict audits and sanctions, fewer corporations take advantage of the allowance than they could. However, the related allowances might be applied without any risks by involving an expert of this taxation area with regular procedures.
In the present blog post we have summarized our audit experiences related to R&D activities; further, we would like to assist you to get prepared taking out the most from your R&D activities. Nevertheless, the proper preparation enhances or excludes the right for applying R&D benefits.
Tax audit of R&D activities
The projects implemented with development tax allowance or supported in another way will likely be subject to tax audit. In some case the law itself or tax authority guidelines explicitly require the supervision.
The authority usually initiates the retroactive audit of tax returns or fulfilment of certain tax liabilities. In the course of such control procedures, they check whether the reported R&D activities really to be considered as own R&D, and the supported costs really sufficiently increased for the proper R&D project.
The audit may be carried out by on-site inspection or by investigating the declarations of the taxpayer, the subcontractors or non profit organizations initiating parallel and related tax audit at business partners cannot even be excluded.
Unauthorizedly used tax allowances must be repaid; additionally, they also result in tax shortages, for which the tax authority might impose 50% tax penalty and penalty interest. Additionally, the deficiencies of the documentation might be sanctioned with a default penalty up to HUF 500,000.
Tax authority statistics shows that although, the number of audits decreases year by year, despite this, basically the detected tax difference increases. The reason for this is that, in addition to the too cautious taxpayers mentioned above, many people are still trying to wimp with R&D activities.
One part of taxpayers specifically maliciously applies R&D allowance on those activities, which doesn't consider as such. Namely, it is a basic expectation concerning the R&D activity that something "new" shall be created; however, often this is not the case. Unfortunately, many are ‘plagiarizing’ so that they are presenting already existing achievements as their own innovations. Previously it was difficult for the authority to recognize such; however, R&D activities already caught up in the filter since the establishment of the Intellectual Property Office (IPO). Since then not the local Hungarian Tax Authority (HTA) makes decisions about the classifications but the Intellectual Property Office as expert is involved by HTA.
At the same time, it can be expected that even the bona fide taxpayers will be fined because of procedural errors. It might happen if the R&D activity were not documented suitably by the company.
Most of the time fines are imposed if the costs incurred are not directly related to the actual activity or if they are not occurred for the benefit of the company or if the study does not contain ‘newness’. It is also a typical error that the asset, the intellectual property is filed or activated as result of the R&D activity, but not accounted up to the amortization amount as tax base reduction item.
How to reduce risks
Whereas taxpayers want to reduce the risk of their penalties, the most important thing is to document everything: each correspondence, protocol and the exact time-expenditure on works required for the project. Allowances may be claimed even in cases of the inefficiency of the project; however, for such a case detailed professional-technical and not least financial-accounting documents are more important to support the sightful application of the R&D allowances.
While on the other hand if the HTA delegates the IPO as an expert, a disadvantage is that the taxpayer cannot consult with the expert office. Another good advice for all the projects is to ask for the qualification of the R&D activity from the IPO by the taxpayer itself. Qualification check may be requested for the project before its commencement or after, retroactively. The advantage of previsions qualification is that such type of procedure will be binding on any HTA audits and the HTA will have to accept the results.
During the investigation of the R&D activities the followings will be examined:
- Who made proposals? Are there any documents prepared about the initiative?
- What were the technical, financial, strategic goals?
- How does the project fit into the strategic targets of the company?
- Does the company have a strategic plan, if yes, does it contain R&D activity?
- How many person’s assistance was needed to carry it out? How much time was spent on each working process per person?
- How was the project documented?
- How did the project end? Does the result meet the professional's expectations?
- Did the taxpayer check the project himself? Did he make any comments?
- Was the recording of the economic events according to regulations?
- Did the registry of the entry happen regularly?
- What are the technical, scientific and technological advantages of the project?
- Did the project has financial limit, e.g. was there any budget? If yes, was it successfully kept?
- Detailed analysis of the R&D contract.
- Was there any impact study?
- Were the results measured?
- Were the deadlines or even the part-deadlines observed?
- How were the fees calculated and paid?
- How they have kept in touch with the authorities?
- Who did purchase the permissions?
- Has a proper provision been made about the rights of intellectual creations? Is it regarded to a person or to a company?
- Who is responsible for the damages and why?
- Has the otherwise acceptable un-profitableness been documented?
The list might seem too exhaustive but real savings can be laid by the thorough preparation and proper knowledge of legislations in the taxation of R+D activities.
If you are unsure about the qualification of your R&D project and the taxation opportunities available, please do not hesitate to contact us. Leitnerleitner’s specialized team of experts is ready to assist you in the application of legal benefits in the field of R&D.