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Regional Court opposed to tax administrator’s approach to R&D allowance

The Regional Court of Justice in Hradec Králové in judgment No. 52 Af 18/2016 dealt with a case where a tax administrator challenged a research and development (R&D) allowance claimed by a taxpayer. The court in particular opined on the moment of the commencement of R&D project work and the duty to maintain separate records of projects costs, and confirmed yet again that if there are doubts as to the presence of a valuable element of novelty or technology uncertainty, an expert witness has to be appointed.

The tax administrator primarily insisted that the taxpayer failed to meet formal requirements for claiming the research and development allowance, arguing that the R&D work had been commenced before the projects were completed, and that the taxpayer did not maintain separate records of R&D costs. The tax administrator’s conclusion on the late preparation of the projects were deduced, for instance, from the existence of binding orders that had been received before commencing the project work. In the tax administrator’s opinion, by accepting these orders, the taxpayer in fact confirmed that the products could be produced, with certainty. From this, the tax administrator then deduced that the project solution and its aims must have been known even before the R&D projects were prepared. The tax administrator also supported these conclusions by referring to the wording of an internal policy on the methodology of carrying out research and development activities, which it applied on R&D projects regardless of the date of policy and of the individual projects.

The failure to maintain separate records was deduced from the fact that the taxpayer did not claim all costs incurred in connection with the implementation of the R&D projects. From this, the tax administrator mistakenly deduced that the costs were not recorded separately from the moment of commencement of R&D project work, as these activities were actually carried out before this time.

The Regional Court disagreed with the tax administrator’s assertions. According to the court, the tax administrator must again assess whether the formal requirements for claiming the R&D allowance were met in the context of a more precise interpretation of the term “commencement of R&D project solution”. In the court’s opinion, R&D project work only commences at the point when a project is approved, and from that time the taxpayer is also obliged to maintain separate records of costs. It is solely up to the taxpayer what activities they carry out before approving the R&D project (as long as the costs of these activities are not claimed within the R&D allowance), and it is also up to the taxpayer what costs they claim within the allowance (and what they do not).

The court also dealt with the issue whether the project contained a valuable element of novelty and eliminated technological uncertainty. The tax administrator concluded that the technological uncertainty that was to be eliminated in the project was non-existent, as the parameters of the orders were exactly defined. According to the tax administrator, the taxpayer also failed to sufficiently prove the existence of an element of novelty, despite producing an expert opinion: the tax administrator considered the expert opinion inconclusive and unreliable, while also stating that they had staff with sufficient expertise to make conclusions needed for its decision. While agreeing with the tax administrator that the expert opinion submitted did not prove the compliance with the material requirements for R&D projects, the Regional Court stated that the tax administrator erred by not obtaining further evidence in form of a new expert opinion.

This judgment is yet more good news for taxpayers claiming R&D allowances.