What is the issue?
By law, an R&D Tax Incentive consultant needs to be a registered tax agent. Hence, many (if not most) R&D Tax Incentive consultancies are accounting firms. The problem is that preparing a compliant R&D Tax Incentive application needs more than good accounting skills. Preparing an effective application requires different skills again – the difference will be explained below.
In terms of compliance, there a few challenges:
- The R&D Tax Incentive has it’s own rules for what R&D activities you can claim.
- The R&D Tax Incentive has it’s own set of rules about what expenses you can claim.
- Does the consultant have enough technical insight to know what is compliant?
Even if an R&D Tax Incentive consultant is a registered tax agent, there is no legal requirement for that consultant to know the R&D Tax Incentive requirements, even if that may be a reasonable expectation.
In December 2019, the Australian Small Business and Family Enterprise Ombudsman’s Office (ASBFEO) conducted a review of the R&D Tax Incentive. One of the observations they made was:
“Given the complexity of the legislation, the R&D consultant should be an expert in the legislative aspects of the program; however, there is no guarantee that a tax agent with the R&D condition understands the rules of the R&DTI and has experience in assessing the validity of a company’s claim.”
Another problem is that without R&D experience, technical skills and STEM (Science, Technology, Engineering, Math), the consultant may struggle to relate the legislative requirements to their clients R&D. This may result in issues with the scope of the claimed R&D activities.
A bigger problem is that without technical expertise, R&D experience and STEM, the consultant will struggle to explain your R&D activities in the R&D Tax Incentive application to AusIndustry. This may not affect compliance but will make it difficult or impossible for AusIndustry to understand and assess the application.
If your application is reviewed by AusIndustry, a poorly written application will guarantee that your application will be reviewed in detail. This will result in significant time, effort, expense and stress on your part to resolve, even if your application really is compliant. A well-written application may see your application passed by AusIndustry without a detailed (desk) review. See AusIndustry reviews.
Skills needed by your R&D Tax Incentive consultant
Your R&D Tax Incentive consultant obviously must be intimately familiar with the technical and financial requirements of the R&D Tax Incentive.
The consultant you use should also have technical skills, R&D Industry experience and STEM (Science, Technology, Engineering, Math) qualifications.
Having technical skills is one thing. Explaining complex technical concepts in straightforward terms is also invaluable when drafting R&D Tax Incentive applications for AusIndustry. At the very least, this will make it much easier for AusIndustry to assess your eligibility, and may well avoid a more stressful detailed (desk) review by AusIndustry.
Unfortunately, there is no legal requirement for an R&D Tax Incentive consultant to have any of this, and in fact, many don’t.
If you want to go straight to the checklist for identifying a good R&D Tax Incentive consultant, then read How to choose the right R&D Tax Incentive consultant.
Roles in an R&D Tax Incentive application
There are several roles involved in preparing and submitting an R&D Tax Incentive application. These roles are distributed between the claimant and the R&D Tax Incentive consultant, as neither has all the knowledge and expertise needed:
- The claimant doesn’t understand the requirements of the R&D Tax Incentive, or how to show compliance with those requirements.
- The R&D Tax Incentive consultant doesn’t understand the claimants R&D (at least, not initially)
Hence, the R&D Tax Incentive application must be a team effort. A successful result will require some overlap – either the claimant needs to know a bit about the R&D Tax Incentive requirements, or the R&D Tax Incentive consultant needs to understand the claimants R&D (at a high-level), or perhaps a bit of both.
Some of the roles will always be fulfilled by the claimant (the company):
- Creating technical supporting documentation
- Providing technical summary information for drafting the AusIndustry application.
- Reviewing the drafted AusIndustry application
- Providing Profit and Loss accounts for the ATO R&D Tax Schedule (this will come from the claimant’s accountant)
The R&D Tax Incentive consultant will generally handle other roles:
- Ensuring that all eligible R&D has been identified
- Ensuring that the claimed R&D is compliant with the R&D Tax Incentive requirements, and demonstrating this in the AusIndustry application
- Advising the claimant on supporting documentation and financial record keeping requirement
- Drafting and submitting the AusIndustry R&D Tax Incentive application
- Preparing and submitting the ATO R&D Tax Incentive schedule
Whilst these roles will not change significantly between different claimants and different consultants, the weight given to some of these roles most certainly does change.
If the claimant does a good job of providing technical summary information of the R&D performed, then the consultant will have a much easier time with capturing the high-level technical summary of the R&D to be claimed, which will also result in a better quality application. Conversely, if it falls exclusively to the consultant to create a technical summary of the R&D (either from the detailed technical documentation or by face to face discussion), then you will need a consultant with strong technical skills and STEM qualifications (see below).
Even when the claimant does provide good technical summary information, drafting a clear and concise technical narrative for the AusIndustry application requires good technical writing skills if the narrative is to be understandable by AusIndustry.
Your relationship with your consultant
This is mainly concerned with how ‘hand-on’ you want to be with your consultant. Most businesses want a very ‘hands-off’ relationship – they want the consultant to take care of the R&D Tax Incentive application so that they don’t have to spend any time on it. There is a certain minimum level of time that you and your staff will need to devote to supporting the consultant – even the very best consultants are not miracle workers – they cannot synthesise a good application out of nothing or very little.
The following discussion relates to the AusIndustry (technical) application since this is where many of the problems arise. Since R&D Tax Incentive consultants must be registered tax agents, problems with the ATO R&D Tax Schedule are much less common.
If you are relying on the consultant to drive the R&D Tax Incentive application process, then you need a very proactive, technically savvy and self-sufficient R&D Tax Incentive consultant. You need one you can trust (see Do you trust your R&D Tax Incentive consultant?) By that, we don’t mean an honest consultant we mean one that you can trust to do a high-quality job on your application, without a lot of oversight. More specifically, it would help if you had a consultant who is technically ‘switched-on’ enough to know when the technical narrative in the AusIndustry application makes sense. Regardless of which consultant is drafting your AusIndustry application, you should always review the application before it is submitted anyway.
If you are prepared to take more responsibility for your application, including reviewing it carefully before it is submitted, then you are on safer ground.
Great R&D is typically undertaken by smart and talented technologists, engineers, scientists and technicians. Unfortunately, brilliant people often have trouble explaining their work to laypeople – they are literally too close to their work and often get stuck in the detail of the R&D. Also, they will often forget about the amount of assumed (context) knowledge needed to understand what they are doing.
Often the R&D will be highly technical and complex. Summarising that R&D can be a real challenge. Fortunately, it is only necessary to present a very high-level view of the R&D in the AusIndustry application, but it does need to be coherent and readable. More importantly, you must show compliance with the R&D Tax Incentive requirements. Showing compliance and keeping the explanation high-level is a definite skill.
It is much easier for a suitably skilled R&D Tax Incentive consultant to learn enough about a clients R&D than it is for the client to learn enough about the R&D Tax Incentive requirements. The problems start when the consultant is not suitably skilled (technically), and the client takes a ‘hands-off’ approach dealing with the consultant.
Extracting the essence of your R&D and presenting it in simple terms to a layperson outside the company is a skill that a good R&D Tax Incentive consultant should have. Unfortunately, this is not a strong skill with many R&D Tax Incentive consultancies. If this applies to your situation, then you will have to pay closer attention to reviewing the AusIndustry application before it is submitted.
Why STEM qualifications?
A good R&D Tax Incentive consultant will have solid technical skills, experience in R&D in Industry, and sound STEM (Science, Technology, Engineering and Maths) qualifications. Do not use a consultant without these skills, for reasons explained below.
These skills will allow the consultant to extract the key points from your claimed R&D and present this information in the most effective context to show compliance. The consultant will be looking for:
- Technical/knowledge gaps that required the R&D
- Your theories and strategies for tackling those technical gaps
- What experiments you ran to test your theories
- Results from these experiments and what those results said about your theories – confirmed or not
What AusIndustry wants to see is a systematic progression of work involving the elements noted above.
The consultant will be presenting this information in an easy to follow Narrative that allows the AusIndustry reviewer to follow along and efficiently tick off the R&D Tax Incentive requirements, without requiring additional information.
The more roadblocks you put in the way of the AusIndustry reviewer (lack of information, requirements not addressed, hard to follow explanation), the higher the risk that the reviewer will start questioning your application.
Without technical skills and STEM qualifications, your consultant will struggle to explain the connection between the elements noted above and the connection with the R&D Tax Incentive requirements. The result is often an incoherent and confusing explanation that the AusIndustry reviewer will find enormously frustrating. Deliberately obscuring your explanation to cover up the lack of eligible R&D is also a bad idea.
These technical skills will also allow the consultant to know when they don’t have enough of an understanding of your claimed R&D, and when to ask for additional information or clarification. It also means that they know the right questions to ask and can minimize the impact on your time (see R&D consultant understand your R&D?)
You may think that without knowledge of your industry (or your R&D domain) that technical experience and STEM qualifications may be of limited use. However, you will be surprised how much a good consultant will understand, and how far good analytical skills will take them.
A poor Tax Incentive consultant may not even realise that their technical explanation of your R&D in the R&D Tax Incentive application doesn’t make sense. This is particularly true when the consultant has just taken your own words and used them out of context or has joined passages of text in ways that don’t make sense. This is, unfortunately, all too common.
Yes, a competent consultant will ask you to review the application before it is submitted. However, a good consultant will be confident that the explanation should basically make sense, and that they are asking you to check that they haven’t gotten some of the details wrong.