Module 9: Reviews and audits

A claim is reviewed twice: by the company before it is filed, and possibly by the tax authority afterwards. The first review is the one you control, and it decides how the second goes. This module gives a checklist that tests each project before it enters the claim, a way to document the decision to leave a project out, and what to expect if the tax authority asks questions. "Review" is used here for any such questions; each country page uses the tax authority's own term.

What this module covers

• A seven-point pre-claim checklist, with what a pass and a fail look like.
• Why a documented exclusion matters, and the five lines it needs.
• How reviews start, what the tax authority asks for, and how to respond.
• How reviews are selected and time-limited in each of the seven countries.

The pre-claim checklist

Run every candidate project through the seven points before it is costed. The tax lead does this with the engineer who did the work; the answers go on the project's row in the candidate list. A project that fails any point is narrowed until it passes, or excluded.

The guide Contemporaneous documentation: what reviewers actually look for covers point 6 in depth. If the tax lead cannot explain a project in two minutes with a record in hand, the project is not ready.

Documenting the decision to exclude

Most companies document what they claim. Few document what they chose not to claim, and that gap costs them twice. A reviewer who sees a claim covering every initiative in the engineering department assumes no filter was applied; visible exclusions show judgement, which is what the reviewer is testing. And the same borderline project comes back next year; without a record the decision is made again, sometimes the other way.

An exclusion memo needs five lines, kept with the candidate list:

1. The project, in the engineer's words, and who was interviewed.
2. Which checklist point it failed, with the fact that decided it.
3. Whether part could have passed if narrowed, and why that was or was not done.
4. Who made the decision, and the date.
5. What would change the decision in a later year.

Treat a narrowed project the same way: record what was taken out and why. Consistency is itself evidence of care, and the penalty rules in all seven countries distinguish carelessness from care taken. The guide Why claim integrity matters sets out the cost of the alternative.

What to expect if the tax authority asks questions

Six of the seven tax authorities select claims for review on a risk basis; the United States selects research credit claims through its normal return selection processes. Factors named in the Canadian and Australian guidance include the claimant's history, the size and change in the claim, the sector, the claim preparer, and the quality and consistency of the information supplied. A review usually begins with a written request for information with a response period, and asks two kinds of question. Technical questions test whether the projects meet the definition: what the uncertainty was, why existing knowledge did not resolve it, what was done. Financial questions test the costs: how time was apportioned, which records support it, whether the narrative and the ledger agree. Several tax authorities may consult external experts; in some countries the reviewer communicates preliminary findings before concluding, and a meeting or site visit with technical staff is part of the process. Afterwards there is a route to challenge: an internal second look, a tribunal, and the courts.

How to respond

• Appoint one point of contact, usually the tax lead, who logs what was asked and sent, answers the question asked in full by the date given, and asks in writing for more time rather than sending something partial.
• Lead with records made at the time, then the narrative.
• Let the engineer who did the work answer technical questions, briefed but not scripted.
• Where a project was borderline, say so and show the exclusion or narrowing decision; several countries' penalty rules reduce penalties for voluntary disclosure.

Illustrative example

Illustrative example. Harbour Robotics Ltd, a hypothetical company, brings five candidate projects to the pre-claim check, each with 100,000 of staff cost, 500,000 in total. Project A passes all seven points. Project B fails point 1: the only open question was whether a certified component would arrive in time; it is excluded with a memo. Project C fails point 4 because the boundary was the whole new product line; narrowed to the control algorithm that could not be made stable with published methods, it passes with 40,000 of the original 100,000. Project D fails point 2: the technique came from vendor documentation and worked first time; it is excluded with a memo. Project E passes once its test logs are found on a departed engineer's drive and copied to the claim folder. The claim is filed on 240,000 of costs, with two exclusion memos and one narrowing record. Eight months later the tax authority asks for the project descriptions, the basis of the time apportionment and the records for the largest project. The tax lead sends the candidate list, the time records, Project A's test logs and, unprompted, the two exclusion memos; the reply takes two days because everything is in one folder.

Across the seven countries

Register wording for how claims are selected and how long the tax authority has to act; the linked pages hold the stages, penalties and appeal routes.

Where to go next

• Contemporaneous documentation: what reviewers actually look for.
• Why claim integrity matters.
• Writing a technical narrative that survives review.
• Module 1: Scheme mechanics.
• In-House Finance Team Program overview and country tracks.