Common Mistakes in Claiming R&D in the fields of Software and Hardware
The R&D Tax Incentive is not a competitive scheme. Nonetheless, claiming it may not be easy as it seems— it involves a lot of eligibility requirements as well as making sure the activities meet the definition specified in the legislation. Here is the list of the most common mistakes in claiming R&D that first-time claimants make when lodging their applications.
1. Claiming R&D based on project rather than activity
Many companies with innovative projects make the mistake of lodging their entire project as a core activity. It is important to remember that core activity roughly refers to innovative activities within a project— a company may have an innovative project, but it does not necessarily equate to having an innovative activity within that project.
2. Experiments are not described clearly and adequately
Experiments or sets of them are an important part of a core activity— it shows the steps you have taken or intended to take to fill in the knowledge gap. Without a description of the experiment or how you plan to conduct it, the core activity will not be able to meet the “systematic progression of work” requirement. A core activity follows a systematic progression of work if it starts with a formulation of a hypothesis, followed by experimentation to test the hypothesis, evaluation, and finally, drawing of conclusions. We wrote a blog post about systematic progression to delineate what it means for your project.
3. Weak knowledge gap or technical challenge
Before starting your application, you must ensure that the knowledge gap is deep enough that a competent professional in the field would also agree that it is indeed a knowledge gap. Simply put, a knowledge gap can only be filled through experimentation as there is no available knowledge that can be used to solve the technical challenge. When identifying the knowledge gap or the technical challenge, the description of the problem must clearly specify the technical and functional requirements that need to be resolved.
4. The outcome of the core activities can not be easily known or deduced in advance by a competent person in the field
Similar to point number 3, a company must ensure that the only way to know the outcome of the core activities is through experimentation and that there is no knowledge available that can tell you what the outcome of the core activity is until you conduct your experiments.
5. The conduct of the core activities is not following the systematic progression of work
Although the term systematic progression of work may be easy to associate with scientific procedures or traditional software development life cycle approaches, it is not at all impossible to show that a systematic progression of work has taken place in projects developed in modern software development approaches. For instance, recording a hypothesis statement before the sprint planning step of the Agile process is a great way to prove that the hypothesis aspect of a systematic progression of work was accomplished.
6. Not having contemporaneous records to support the claims
Documents generated at the time of an R&D activity are referred to as contemporaneous records. These documents serve as proof of the actions taken and the events that took place at each stage of the development process. It is therefore crucial to make sure that all records or documents gathered at each stage of the development process are accurately dated. The R&D tax incentive claim is less able to be supported by records that were gathered or produced well after the development of the R&D activity.
Being informed and updated with the current legislative requirements of the R&D Tax Incentive will help you easily avoid the above mistakes. Before starting an R&D project, it is best to identify the potential core activities early on and conduct them in a way that follows the systematic progression of work requirements of the incentive scheme. If you need expert advice or simply want to know more, you are welcome to book a free consultation with us.
Our company, Innercode, is composed of dedicated government grants consultants specialising in the R&D tax incentive for the technology industry. We have many fruitful years of experience delivering and helping companies acquire tax incentives. Through our streamlined process of analyzing claims, we are confident that we can help you determine your eligible projects and activities with just a few hours of your time.
Further reading:
R&D – Innercode. 4 Feb. 2020, https://innercode.com.au/innercode/rd/.
