Research Tax Credit – MESRI 2019 guide version

Early December, the Ministry of Education, Research and Innovation (MESRI) published its 2019 edition of the Research Tax Credit Guide (RTC). It became official while the 2020 finance bill is still under discussion in Parliament.

This guide aims at accompanying companies claiming RTC during analysis, calculation, tax filling and justification. Although this document can’t be opposed to tax authorities nor taxpayers and cannot replace the legislative and regulatory texts, it should be taken into account in the RTC process as it often appears to be a precursor of new positions adopted by the tax auditors during the control procedures.

Therefore, which changes should be kept in mind in the RTC process management ?

As a preamble, we draw to your attention that the guide mentions the new model of supporting file adopted in the 2018 doesn’t apply retroactively to previous years. This information removes an uncertainty and therefore secures the RTC process of past years.

The 2019 changes concern the different steps of the RTC process (technical scope, financial valuation and justification). They also affect the procedure to be followed in the case of an audit.

Let’s quickly go over a few new features that will have a lesser impact, although of course they are worth being known. Let’s mention, for example, the confirmation of options for valuing staff costs outside the reporting company (using either inter-company assignment or subcontractor) or patents whose R&D indicator role is nuanced.

1) New features regarding expenditure qualification

Different types of eligible expenditure are impacted by changes occured in this 2019 edition of the Guide, mostly subcontracting and overhead costs.

• Subcontracting expenditure

In line with what we identified in recent tax audits, the notion of R&D subcontracting is clearly subject to an increasingly restrictive framework. This was initiated by the need for the service to be intrinsically eligible on its own, and the 2019 guide now also differentiates between « specialty » and « capacity » subcontracting.

The position adopted by the MESRI is to exclude capacity subcontracting (identified as a simple execution of a client’s request who retains scientific coordination, without the contribution of additional expertise from the subcontractor). In other words, only specialty subcontracting now qualifies. In this case, the subcontractor is chosen for its superior scientific and technical skills (which the principal does not have), enabling it to ensure the scientific coordination of the R&D operation.

Please note these details do not appear in the legislation, which reveals a risk of insecurity for the companies claiming RTC. Indeed, on the one hand, it can be seen as a potential argument for excluding routine R&D expenditure or so-called in-house services. On the other hand, there is a risk of divergent interpretation and positioning between the three players that are the MESRI, the tax authorities and the judge.

Finally, it is advisable to provide, for each subcontracted research service, a summary of the work carried out by the subcontractor.

• Overhead costs

In its guide, MESRI mentions a decrease from 50% to 43% in the flat rate calculated on staff costs for the year 2019. Considering the 2020 finance bill is currently being discussed in Parliament, this change in the rate should rather apply to expenses incurred from 1 January 2020, as retroactivity isn’t planned.

2) Changes regarding the technical perimeter

The guide focuses on the supporting data to be collected and prepared to document the expenses declared in the RTC, in accordance with the expectations of the tax authorities and MESRI.

It should be noted this is likely to generate a greater workload for the claimants, in line with the feedback from the controls triggered since 2019.

The guide begins by mentioning the need to provide a scientific and technical file for each R&D operation with a description of the work carried out.

Specifically for subcontracting expenditure, the guide required as supporting documents :

– the copy of each specification and the list of deliverables (or document expressing R&D needs transmitted to the subcontractor) :

– the record of technical milestones as work is in progress,

– a copy of each invoice for subcontracted work,

– a copy of the certificates of approval for the year concerned.

In addition, the claimant must fill in the elements requested in the Excel file made available by MESRI as a summary of all qualifying costs.

In this respect, it must indicate for each of the outsourced research works :

– the name of the subcontractor,

– the R&D operation the subcontracted works may be attached to,

– a summary of the work performed by the Subcontractor,

– the amount invoiced.

3) Changes in procedures and specific statutes

Unlike in previous years, the guide focuses on the procedures governing the RTC claiming. In particular, it deals with tax audits, the different types of rescripts and applications for approval. It also highlights the Young Innovative Company (JEI) and Young University Company (JEU) statutes.

As a summary, the 2019 MESRI guide clarifies certain points but above all provides an even better framework for the valuation and justification of subcontracting expenses, as well as R&D operations declared in RTC. It is expected that the workload for any claimant to secure his RTC will be even greater, hence the increased need to use expert advice in the field.