Ombudsman’s Review of the R&D Tax Incentive

Small Business & Family Enterprise Ombudsman’s Review of the R&D Tax Incentive

The much anticipated Review into the R&D Tax Incentive (R&DTI) conducted by the Small Business & Family Enterprise Ombudsman, Kate Carnell, has now dropped and it’s fair to say that Ms Carnell hasn’t pulled any punches.

In short, the review found that the complaints of those small and family business taxpayers whose historic R&DTI claims had been subjected to review were well and truly justified. It was critical of the inordinate amount of time that was allowed to elapse between the R&D and the implementation of the compliance activity. It found that in most cases that the compliance activity itself was not only “untimely’’ but also “inconsistent and in many cases targeted’’. Moreover, the review identified that there had indeed been “an overall shift in the way the R&DTI legislation has been interpreted over the last three to four years’’ with “a narrowing of focus leading to a rejection of claims” which previously might have been regarded as “low risk’’.

The Ombudsman concluded that such an approach “undermined the policy intent of the R&DTI legislation” and seemed to be more about “recouping Government expenditure on the R&DTI”. It had not only created uncertainty but “has had a devastating impact on the companies” to such an extent that some now “face financial ruin”. Much more could be said about how compliance activities generally were found to be “reactive”, to “assume guilt” and to “lack the commercial understanding of how small businesses operate”.

In this last respect, we note that one of the recommendations made by the Ombudsman was that “[s]ubstantiation and record keeping requirements should reflect commercial practicality with Regulator personnel fully equipped to understand and collaborate with small business”.

All in all, we think the Review is a pretty damning assessment of the way in which the R&DTI compliance regime is currently being administered.

In the interests of balanced reporting, we should note that the Ombudsman did also examine the role played by R&D consultants. We have to admit that our patch did not escape criticism with the Ombudsman finding that there was evidence of some “mischief” in the R&DTI consulting sector. To be fair, though, this was identified as being largely confined to those unscrupulous operators (including some larger firms) who were aggressively marketing promises of cash tax refunds to businesses. NOAH agrees that such behaviour needs to be stamped out in order to prevent longstanding and well-respected R&DTI consultants from being tarred with the same brush. This is why we wholeheartedly endorse another of the Ombudsman’s recommendations that something akin to Austrade’s “Quality Incentive Program Consultant Register” be implemented in the R&DTI space. This would provide a level of surety to business that a particular R&DTI consultant is indeed properly accredited and has the expertise to offer professional and reliable advice.

The Ombudsman’s other recommendations seem equally well intentioned and sensible, namely that clearer guidance be drafted that is more attuned to small business and assurances given that any audit/ review activity take place as close as possible to the taxpayer’s first year of claim.

We can only hope that the Regulators take these recommendations on board when and if they revise their approach to R&DTI compliance. Reading between the lines, the Ombudsman seems to be quite optimistic that a change for the better might well be on the horizon. Let’s hope that such optimism is not misplaced because what is not in dispute is that the R&DTI can help stimulate Business Expenditure on R&D (BERD) which, in turn, has been linked to productivity growth.