The recent decision of the Administrative Appeals Tribunal in HZXD v Innovation Australia [2010] AATA 879 highlights the importance of good record keeping for companies claiming benefits under the R&D Tax Concession Program.  If you couple this with AusIndustry’s 2011 scheduled increase in compliance activities then good record keeping is money in your pocket. From 2011 Ausindustry plan to review 15% of all R&D claims received as well as all claims exceeding $10m.  This will result in all R&D claimants being reviewed within a 5 year period. The AAT decision related to whether a company’s claimed activities were research and development activities.  Some of the key points of that decision regarding record keeping are extracted and discussed below.

“The first thing to determine is the activities in which the applicant was engaged. The usual way in which activities are determined is by reference to records. Usually, records will be in a documentary, or computer generated time sequenced, form and consist of R and D plans, outcomes of test results, revision control records, minutes of meetings at which development of the project was discussed, invoices for costs incurred and the like. A starting point is to examine the application forms for registration of R and D activities.”

This illustrates the importance to a company of maintaining contemporaneous documentation to assist all parties involved to understand what activities it has conducted and how they meet the criteria. If a company does not demonstrate what the activities are then they cannot demonstrate that they meet the criteria.

‘The lack of supporting evidence leaves the Tribunal unable to calculate what portion, if any, of the application should be accepted as involving innovation or a high degree of technical risk.’

In addressing innovation and high levels of technical risk it will assist the company to be able to demonstrate two or three basic things. Firstly, what the company has done, secondly, what similar activities have been done before and thirdly, by comparison, how what they have done differs to what has been done before. Some documents that might assist a company to demonstrate the second of these points include patent search results and reports from the start of the activities, reports of benchmarking activities undertaken, risk analysis studies, internal governance papers seeking approval to commence or continue work to address an unknown or any other document analysing the unknowns and the risks involved.

Good record keeping involves generating records at the time activities are being conducted and maintaining those documents in a secure environment. Good records don’t only help a company to meet its compliance obligations, they also assist the company and its advisors to self-assess their eligibility and to potentially identify new areas where they can access the benefits of the program.

‘[A witness for the applicant] told the Tribunal that there was no record available of the work carried out. Sometime in early 2006, the hard drive on his computer, on which the records were retained, had been damaged, and he had been unable to afford to retrieve the information. No backup of the computerised information was in place’.

All companies should have a system in place to backup their electronic files. This is a very simple, relatively cheap insurance policy for a company. For a company conducting research and development activities to lose all records of their work, the cost to the company may be far more than the ability to prove their claims to the program.

‘There were no timesheets maintained. Notepad entries were unable to be produced as [the witness for the applicant] had either lost or destroyed them.’

Hardcopy documents including all notes should be kept in an easily accessible logical system. Several copies should be made of crucial documents and precautions taken against the risk of fire or other destruction. The benefits of such a system to a company extend far beyond the R&D Tax Program. They can actually assist the company to conduct its work or re-visit ideas, processes and solutions in future. A company’s stockpile of information is a valuable resource. If the work is worth doing then it’s worth recording.

‘[A witness for the applicant] was unable to provide particularisation of any testing carried out as the project advanced due to the lack of contemporaneous records.’

‘…it is unknown what experiments were carried out… In the absence of that pertinent information, the Tribunal is unable to conclude that whatever work was done was either innovative or involved high levels of technical risk.’

The people giving the evidence were the ones that claimed to have done the work. If they couldn’t remember what they did in sufficient detail without records then how would the company have been able to demonstrate their case if the people who did the work had left the organisation?

Several years can elapse from the commencement of a project, through to the end of the compliance journey. Unless the records are available then how will your company be able to recall, explain and demonstrate the activities it has conducted in the detail necessary to establish its claims to research and development activities. Documentation of claimed activities is vital insurance against staff turnover and in the event of a scale of the business could add value to the sale price as buyers conducting due diligence are likely to be interested in examining such documents. Being prepared to provide the explanations of the activities early in the compliance process and the documentation to back that up if required can greatly reduce the time and money spent in compliance activities, allowing the company more time for innovating.