While the aim of our article series is to encourage businesses to identify activities that qualify for R&D incentives and take advantage of the available tax benefits, in this final article we would like to highlight the importance of compliance and the risks associated with audits.
The key consideration is that support should only be
claimed for costs genuinely related to R&D projects, and every step of the
process must be properly documented. It is also advisable to involve technical
experts in the evaluation of projects and seek assistance from tax advisors
with tax calculations and documentation.
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Auditing R&D Projects
The most common type of review is a retrospective
audit of the legitimacy of R&D tax incentives, although compliance reviews
of ongoing projects are also possible.
In the case of a compliance review, authorities may examine an ongoing project and may repeat the review if necessary. At the same time, taxpayers have the opportunity to submit a self-revision during a compliance review. Such reviews may result in default penalties at most; however, if deemed necessary, the authorities may initiate a tax audit, during which a tax deficiency can also be assessed. In both types of procedures, the burden of proof lies with the taxpayer.
Audit Methods
The authorities may:
- Conduct on-site
inspections;
- Request statements
from organizations involved in the project;
- Perform related
audits of those organizations;
- Examine the documentation of the R&D project.
Key Questions in an R&D Incentive Review
The primary issues to be determined are:
- Whether the project
was correctly classified as an R&D activity, which requires reviewing
the contents of the relevant R&D agreements;
- Whether the R&D costs claimed for the project are eligible and properly substantiated.
Advisory services related to tax incentives are among the favorite areas of expertise of LeitnerLeitner’s consultants. We help our clients achieve their business objectives more efficiently and more quickly, without having to struggle with complex requirements and administrative burdens. Feel free to contact us when assessing the legitimacy of R&D tax incentives. We can help substantiate the eligibility of your claims and support you throughout the compliance process.
Specific Questions Typically Examined During a Tax Audit
- Who initiated the
R&D project?
- Is there
documentation of the initiative?
- What were the
project's technical, financial, and strategic objectives?
- Does the R&D
project align with the company’s strategy?
- How is the R&D
activity financed?
- How many people are
involved in the project, and how much time do they devote to it?
- Does the project
documentation meet the expected standards?
- What happened to the
project results after successful completion?
- Were the related economic transactions properly recorded?
The Most Common Mistakes in R&D Projects
- Costs are not
eligible for lawful deduction or support.
- The activity is not
sufficiently innovative or novel.
- The result of the R&D activity has been capitalized or recognized as an asset.
Another common mistake—although it does not trigger penalties—is failing to obtain a preliminary qualification of an R&D project. Doing so can significantly reduce future audit risks.
Failing to Identify R&D Opportunities Is Also a Mistake
The tax authority will not penalize a company for missing an R&D incentive opportunity, but doing so may slow business growth. Likewise, failing to capitalize eligible development costs can be disadvantageous, particularly given the time limitations applicable to loss carryforwards, as capitalization may allow costs to be recognized at a later stage. Companies should also remember to consider additional tax-base-reducing items beyond the deduction of R&D costs against pre-tax profits.
Overlooking an R&D opportunity and failing to claim available tax incentives can be just as detrimental to a company as classifying an entirely ordinary activity as R&D. With the support of a competent advisor, both mistakes can be avoided.
Examining
the Legitimacy of R&D Tax Incentives
What R&D incentives are available in the Hungarian tax system and in the form of financial support?
How are economic recovery trends changing – R&D activities are coming to the forefront
