The Revenue can effectively audit any claim made within the last 5 accounting years this is the statute of limitation.

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1 Appendix 10: Irish Revenue Audits When auditing (can be either a desk or field audit) R&D tax credit claims, the Irish Revenue may appoint an external independent technical expert (usually a Professor from a local university) to adjudicate on the nature of the R&D activities. The Revenue can effectively audit any claim made within the last 5 accounting years this is the statute of limitation. Revenue Audits If a company is notified of an RDTC audit, as opposed to an RDTC enquiry/review, then the audit will be carried out in accordance with Revenue's Code of Practice for Revenue Audits, with relevant provisions in relation to the making of disclosures applying. A Revenue audit of an RDTC claim is exactly what it sounds like but it is different from a normal tax audit that many companies will be familiar with. During an audit the Revenue will review and adjudicate on the appropriateness of the R&D claims made and issue their findings accordingly. These findings may be in agreement with the positions taken by the company itself or the Revenue may conclude differently. The main difference from other tax audits is that the audit in addition to tax and finance, generally involves a thorough review from a scientific or technological perspective. Revenue frequently engage the services of a relevant technical expert to assist them in this regard. As well as this scientific review, the claim is subject to examination from a financial and tax technical perspective by a Revenue Inspector. Essentially, to pass a Revenue audit and to be eligible for the credit, a company must be in a position to clearly demonstrate: The Science Test that the activities under review are consistent with the statutory definition of R&D activities. The Accounting Test that the expenditure claimed as being laid out on qualifying R&D activities is correctly so claimed. Revenue s Appointed Expert Revenue usually consults with qualified individuals who have specialised knowledge in the relevant technological or scientific field to determine whether the expenditure incurred by a company was incurred in the undertaking of qualifying R&D activities (i.e. whether the science test requirements have been met). These experts are often sourced from Irish Universities and would often be Heads of Department or Professors in their respective specialism. In more recent times, Revenue have appointed independent, suitably qualified and experienced private consultants to review R&D claims.

2 It is a condition of claiming the R&D tax credit that Revenue can appoint any person to review a company s claim that they deem can offer assistance to help ascertain whether the activities claimed by the company are qualifying in nature. The Revenue can disclose any information about the company s claim to these appointed experts. S766 (7)(a) states that The Revenue Commissioners may in relation to a claim by a company under this section of section 766A, (i) consult with any person who, in their opinion may be of assistance to them in ascertaining whether the expenditure incurred by the company was incurred in the carrying on by it of research and development activities In advance of the appointment and more importantly in advance of any information being shared, the Revenue is required to notify the company about the identity of the expert and the information they intend to disclose. The company has a right of appeal (firstly to the Revenue commissioners and then to the Appeal Commissioners) they demonstrate that the nominated expert presents a conflict of interest and will be harmful to the company s business. In our experience Revenue appreciate the sensitivities that surround the potential for conflicts of interest and will accommodate an objection that has merit. The Revenue s appointed expert is bound by the same confidentiality conditions as the Revenue official themselves (i.e. the Official Secrets Act 1963) before commencing their period of consultation with the Revenue. This should provide comfort to the company being audited that they can disclose the appropriate information. The Revenue s expert however will not sign a Non Disclosure Agreement with the taxpayer. The appointed expert will report to Revenue whether, in their opinion, the R&D activities carried out constitute qualifying R&D activities, do not constitute qualifying activities, or partly do. Also, they often offer a view on the reasonableness of the qualifying expenditure e.g. whether it is likely that the project they have reviewed could reasonably be expected to have cost as much as the company has claimed. Documentation It is unlikely that a company will successfully complete an R&D Revenue Audit without maintaining detailed records of the activities it conducts and the expenditure it incurs on R&D. To meet the definition of a qualified company in S766 TCA 1997, a company must maintain a record of expenditure incurred by it in the carrying out by it of R&D activities. Additionally, if a company is a member of a group of companies which all carry on R&D activities in separate locations, separate records must be kept at each location. A company must maintain detailed records to demonstrate to Revenue that it can satisfy both the Science Test and The Accounting Test. Essentially it should keep records of the expenditure it incurs and of the activities it conducts. Maintaining sufficient contemporaneous records and documentation is essential to successfully passing inspection at audit. Types of Revenue Review and Audit Revenue audits can vary as regards the amount of information sought, the information reviewed and the length of time they take to complete. The different types of Revenue audit are set out below:

3 Desk Review A desk review is the least intrusive of the review methods and may simply involve Revenue requesting a copy of the R&D report that the company has prepared to substantiate its claim. In essence, this is a report that will include answers to all the 23 questions from the self review letter. This information will be analysed by Revenue to see if any issues arise. Depending on the outcome of the review, further information may be requested and a field audit may follow. This form of audit is usually carried out by way of correspondence only. Financial Audit only It is possible that the Revenue will only seek to audit the tax technical and financial information to support the R&D claims made. Revenue will request the financial records that make up the R&D tax credit claimed. This information will be analysed by Revenue to see if any issues arise. Depending on the outcome of the review, further information may be requested and a field audit may follow. This form of audit is usually carried out by way of correspondence only. Full Field Audit A field audit is an all encompassing audit and will follow the notification of a formal audit. This usually involves a full audit from both a financial and scientific technical point of view and will take place on the company s premises. For a full audit, Revenue would usually appoint a technical expert to review the scientific aspect of the claim. Notification of Revenue Review or Audit The way a company receives notification from Revenue will depend on whether it is the Revenue s intention to conduct a review or a formal audit of the RDTC claims. Set out below are examples of how a company could be expected to be notified of an audit or review. notification Depending on the relationship between the Revenue and the company, a company may receive an request from their Tax Inspector for a copy of the R&D report that the company has prepared to substantiate their claim. In essence, this is a report that will include answers to all the 23 questions from the self review letter. This is an informal request to facilitate a desk review. Depending on the information received, it may lead to a more robust audit. Self Review Letter This letter is an invitation to self review the R&D Tax Credits claimed. It does not constitute a formal audit or a notification of a formal audit. The letter will attach a questionnaire which contains 23 different questions about the R&D tax credit claims. The letter may state that a number of cases will be selected for audit/investigation based on the responses received. You have a greater chance of audit/investigation if you do not respond to this letter. The following are the 23 questions that may be asked:

4 1. State the number of Research and Development projects undertaken. 2. Please provide a summary of the research and development activities in relation to each project. 3. Confirm the date on which each project commenced. 4. Confirm the date on which each project ceased (if applicable). 5. Confirm whether the claim made is in respect of Section 766 or Section 766A of the Taxes Consolidation Act Please state the amount of the 2003 expenditure threshold amount. 7. Confirm that all group expenditure has been included in the threshold amount. 8. Outline the specific scientific or technological advancement, which the company sought to achieve at the start of each project. 9. Outline the specific scientific or technological uncertainty, which the company sought to resolve at the start of each project. 10. Once the uncertainty was resolved confirm that no further expenditure has been attributed to the Research and Development claim. 11. Was the solution already known and available to a competent professional in the field? 12. What were the qualifications of each project leader? 13. Please state the field of science or technology involved. 14. Please confirm which of the following categories do the activities fall under: Basic research Applied research Experimental development 15. Where did the Research and Development activities take place? 16. Please state the number of staff employed in Research and Development activities. 17. Confirm the amount of expenditure incurred (if any), in respect of third party contractors or service providers (excluding utilities).

5 18. Confirm the amount of expenditure incurred (if any), in respect of payments made to a university or institute. 19. In respect of (13) and (14) above, briefly outline the work carried out by the other parties. 20. Where expenditure has been allocated to Research and Development by apportionment, please state in respect of each item, the method and basis used. 21. If the claim includes expenditure on plant & machinery state the percentage used of such equipment on Research and Development over the useful economic life of the asset. 22. Please provide details of any grants received in respect of Research and Development. 23. Please also provide your computation of the tax credit claimed, showing an itemised analysis of each expenditure item. The Formal Audit Letter Notification of Revenue Audit R&D This letter notifies the company that its R&D tax credit claim for a particular period has been selected by Revenue for an audit. It will state that the Revenue auditor will call to the company s place of business on a specified date and at a specified time and will show their identify on arrival. It will usually offer that if for good reasons the specified date does not suit, that an alternative can be arranged. The letter will outline that the audit is being conducted under the relevant provisions of the Legislation and the Code of Practice for Revenue Auditors. It may state that the audit could be extended to cover related tax heads, in certain circumstances, but will focus on the RDTC. It is unlikely that the audit letter will state that only the R&D tax credit is to be audited. The letter will typically then state that it is Revenue s intention to engage a technical expert to provide their opinion of the R&D activities undertaken, and it will name the expert. Depending on the Tax Inspector, it is possible that the company will have been contacted in advance to discuss the appointment of the expert as this will avoid unnecessary delays which would arrive if the company disagrees with the chosen expert. Finally, the letter will set out the conditions that apply should a company wish to make a Qualifying Disclosure (i.e. a disclosure that an underpayment of tax has arisen or that a claim is improperly made). A taxpayer must notify the Revenue of its intention to make such a disclosure within 14 days of the date of the audit letter and has 60 days to prepare the disclosure. There are several advantages to making a Qualifying Disclosure:

6 1. Substantial mitigation of penalties can apply 2. The name of the taxpayer will not be published 3. The Revenue will not initiate an investigation with a view to prosecution of the taxpayer. Statute of Limitations Revenue must notify a company of an audit within four years from the end of the accounting period in which the R&D tax credit claim is filed under S959AA TCA 1997 (S959AA replaces S956 for accounting periods commencing on or after 1 January 2013). However, as set out in S959AA(2) TCA 1997, a Revenue officer may, at any time, amend an assessment for a chargeable period (1) where the return for the period does not contain a full and true disclosure of all material facts necessary for the making of an assessment for that period (2) to give effect to a determination on any appeal against assessment or against a determination to which S949 applies(3) to take account of any fact or matter arising by reason of an event occurring after the return is delivered (4) to correct an error in calculation in the assessment or (5) to correct a mistake of fact whereby any matter in the assessment does not properly reflect the facts disclosed by the chargeable person. Tax shall be paid or repaid where appropriate in accordance with any such amendment. Therefore, for companies with a year end of 31 December 2011 and who file their R&D tax credit claim in 2012, the period within which Revenue can cover all periods up to and including 31 December Settlements with Revenue, Interest, Penalties and Publication When faced with a Revenue Audit, the question of potential exposure to interest, penalties and publication as a tax defaulter will be of concern to the company. The Revenue audit Code of Practice sets out in detail the various aspects of the regime, and the potential implications for failing to abide by the tax legislation. In the event of a settlement with Revenue, interest will most likely be levied. Interest, where applicable, is charged for each day or part of a day at a rate of % from 01 July Penalties are also a possibility depending on the nature of the settlement. For example, if the settlement is in the nature of a technical adjustment i.e. an adjustment that arises from differences in the interpretation or the application of legislation, no penalties should arise. In R&D audits where the Revenue s expert may differ with the company s head of R&D on a scientific point, this may be a technical adjustment. If a penalty is to be applied it can range from 3% to 100% of the tax underpaid depending on the category of default. The penalties are tiered so as to be more lenient where certain disclosures are made and cooperation is in place.