How to keep R&D expense records separate
To claim a research and development deduction in a tax return, taxpayers have to correctly assess the activities, prepare a project documentation, and properly record related expenses, separately from other costs. But what exactly does such separate record-keeping entail?
Court decisions on tax deductions for research and development have been growing in number. So far, however, case law has mostly dealt with the differentiation of research and development activities from innovations, or with required project documentation essentials. Recently, however, the Supreme Administrative Court (SAC) in judgement 9 Afs 144/2016-51 dealt with the manner of recording personnel and operating expenses relating to research and development, including supporting (proving) that they actually have been incurred.
In the case in question, a taxpayer recorded expenses on research and development projects in sub-ledger accounts, not using the option to record the expenses through ‘cost centres’. The accounting records thus did not contain a direct link to specific development projects. The record-keeping of personnel expenses for employees working on the development projects consisted in a plan of percentage share in the employees’ total working hours. The plan was part of the project documentation and prepared prior to the development activities. The tax administrator challenged this expense record-keeping manner as insufficiently supportable and argued that the condition of keeping separate records of expenses had not been met. This resulted in additional tax assessment based on a rejected tax deduction claim.
The SAC fully sided with the tax administrator, stating that the determination of hours worked solely as a percentage of total hours did not at all support (prove) that the employees actually had devoted any time to the development project. According to the SAC, records have to be kept in a manner specifying the employee’s activities, when such activities were carried out, and demonstrating a direct link to research and development activities.
The SAC held that its perceived purpose of separate record keeping is to create a complete inventory of all expenses incurred in the implementation of a research and development project. It also emphasised that expenses in the separate records must be identified in a manner that will link individual accounting documents to the recorded expenses. The SAC did not specify which exact manner of keeping records would comply with its understanding of separate record keeping (i.e. whether accounting through cost centres would be acceptable). Using the SAC’s words: expenses in the separate records must be sufficiently specified and reflect reality.
It is thus advisable to devote proper attention to the manner of recording expenses for research and development projects. We will be happy to assist you in setting up a separate record-keeping system.