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When claiming R&D allowance, attention must be paid to cost accounting

According to the Regional Court in Ostrava, when proving compliance with the conditions for claiming a research and development allowance, it is necessary that expenses incurred in the implementation of research and development projects are recognised as such in accordance with applicable accounting legislation.

A taxpayer claimed a R&D allowance in their 2013 and 2014 tax returns. In the allowance, they included the cost of materials and components which they had initially recognised as fixed assets under construction (account group 04). The tax administrator did not accept the inclusion of these costs in the R&D allowance and assessed additional tax.

The tax administrator emphasised that the R&D allowance is a form of public aid, and thus claiming it is conditional upon compliance with all legal conditions. The tax administrator did not challenge the substance of the research and development projects and accepted the deduction of all costs that were properly accounted for but did not accept the amounts incurred for materials and components that were not charged to expenses.

The taxpayer appealed against the tax administrator's decision, arguing that they had made an error, and that the tax administrator preferred the formal state of erroneous accounting to the actual state of affairs. According to the tax administrator, the taxpayer had chosen the method of accounting for the costs of acquiring fixed assets under construction, while they had not considered the tax consequences of the chosen accounting method. Thus, this was not an accounting error as the taxpayer argued, but a choice of accounting method. The additional tax assessment thus did not penalise incorrect bookkeeping as inferred by the taxpayer, but the failure to comply with all legal conditions.

The Regional Court agreed with the tax administrator's conclusions: for costs to be claimed within a R&D allowance, it is a necessary condition that they are also accounted for in accordance with applicable accounting regulations. On these grounds, the court dismissed the action.

The same conclusion was reached by the Regional Court in Brno (Judgment No. 62 Af 92/2019-73 of 25 November 2021), or the Supreme Administrative Court (Judgment No. 1 Afs 357/2021-50 of 7 June 2022).

Keeping separate accounting records as well as correctly recognising expenses is very important for claiming the R&D allowance. To increase the certainty as to the correct recognition of costs/expenses, a binding assessment can be useful. We will be happy to assist you in this respect and help you prepare it.