Agreed upon procedures engagement
These agreed upon procedures (AUP) are to be performed by an accepted research and development certifier (R&D certifier) who has been approved by the Commissioner of Inland Revenue under section 124ZI of the Tax Administration Act 1994 (TAA).
The AUP are to be performed in accordance with APS – 1 (revised) Agreed Upon Procedures Engagements to Report Factual Findings issued by Chartered Accountants Australia and New Zealand and relevant ethical and professional standards. In addition to the AUP report prepared on completion of the engagement the R&D certifier must complete the R&D certificate which can be found at Appendix A of these procedures.
Additional guidance for businesses and certifiers can be found here.
Guidance for Research and Development Certifiers
When an AUP is required
A person who wishes to claim an R&D tax credit must obtain the Commissioner’s prior approval of their R&D activities. Alternatively, significant performers of R&D can apply for and receive approval of their criteria and methodologies for determining: ·
- whether or not their R&D activities are core R&D activities or supporting R&D activities
- whether or not their expenditure is eligible R&D expenditure.
A person whose criteria and methodologies are approved is required by section 124ZI of the TAA to provide an R&D certificate, from an approved R&D certifier, with their R&D supplementary return. R&D certifiers must perform these AUP before completing the R&D certificate.
Engaging the certifier
The person whose R&D claim is having the procedures performed on it is responsible for engaging and paying the R&D certifier. The engagement agreement should include clauses that allow the AUP report to be provided to the Commissioner with your R&D certificate and supplementary return.
Who is the certificate given to?
The R&D certifier provides the R&D certificate to the person who engaged them. The person is responsible for providing a copy of the R&D certificate and AUP report to Inland Revenue with their R&D supplementary return.
Purpose of the AUP
The purpose of the AUP is to obtain evidence that the person has complied with the criteria and methodologies approved by the Commissioner for identifying eligible and ineligible R&D expenditure, or to report on non-compliance.
For the purposes of this AUP the certifier can assume that the person has complied with all approved criteria and methodologies in relation to determining whether R&D activities are eligible activities. Therefore, this AUP is solely in relation to the approved criteria and methodologies for determining whether expenditure is eligible expenditure.
The R&D certifier is not required to form or express an opinion on the correctness of the R&D supplementary return.
Agreed upon procedures
Required documentation
- Obtain from the client a copy of the application for criteria and methodology approval and Inland Revenue approval letter and any amendments to the approval letter.
- Obtain a copy of the draft R&D supplementary return and supporting calculations and workpapers. Compare amounts on R&D supplementary return with supporting workpapers and note any differences.
Entities covered
Does the R&D supplementary return include expenditure for only those entities covered by the Inland Revenue approval?
- Obtain from client a list of entities whose expenditure is included in the supplementary return. Compare this to those entities specified in the Inland Revenue approval letter and note any differences.
Scope and location of R&D activities
Does the R&D supplementary return include expenditure for only those R&D activities covered by the Inland Revenue approval?
- Obtain from client a list of locations/cost centres included in the supplementary return. Compare these to those specified in the Inland Revenue approval letter and note any differences.
Depreciation
Has the person correctly identified assets used in eligible R&D?
Has the person correctly calculated depreciation?
- Select the 5 largest claimed amounts. Compare criteria and methodology used to identify those assets to criteria and methodologies set out in the approval letter from Inland Revenue and note any differences
- Select the 5 largest claimed amounts and:
- Compare the depreciation rates used to the tax depreciation rates and note any differences.
- Compare the calculation of depreciation, including any apportionment, to the method specified in the Inland Revenue approval letter and note and differences.
Employee remuneration
Has the person correctly identified expenditure for employees performing eligible R&D activities?
Has the person correctly identified expenditure for employees who provide support to employees performing eligible R&D activities?
- Obtain a breakdown of employee costs included in the R&D supplementary return.
- Direct employee expenditure: Select 5 largest employee expense amounts claimed and compare criteria and methodologies used to identify eligible employee remuneration to the criteria and methodologies specified in the Inland Revenue approval letter and note any differences.
- Indirect employee expenditure: Where an amount of employee remuneration is an allocation of an overhead or indirect cost, select 5 largest employee expense amounts claimed and compare the apportionment to the method in the Inland Revenue approval letter and note any differences.
Goods and services
Has the person correctly identified goods and services used in performing eligible R&D activities?
Has the person correctly identified goods and services used in activities that support R&D?
- Obtain a breakdown of expenditure on goods and services included in the R&D supplementary return.
- Direct expenditure: Select 5 largest expense amounts claimed and compare the criteria and methodologies used to identify eligible expenditure on goods and services with the criteria and methodologies specified in the Inland Revenue approval letter and note any differences.
- Indirect expenditure and overheads: Where an amount claimed is an apportionment of overheads, select 5 largest expense amounts claimed and compare the apportionment to the approved method and note any differences.
Ineligible expenditure (Schedule 21B Part B)
Has the person correctly identified and excluded ineligible expenditure?
- If the application or approval letter contains criteria and methodologies for identifying and excluding ineligible expenditure listed in Schedule 21B Part B of the Income Tax Act 2007, compare the criteria and methodology used to identify ineligible expenditure with that specified in the Inland Revenue approval letter and note any differences. Otherwise N/A
Foreign research and development expenditure Section LY 7 Income Tax Act 2007
Has the person correctly identified and calculated foreign R&D expenditure?
- If the application or approval letter contains criteria and methodologies relating to R&D activities performed overseas, or where a non-resident performs R&D for the company in New Zealand, compare the criteria and methodologies used with that specified in the Inland Revenue approval letter and note any differences. Otherwise N/A
Commercial production
Has the person only claimed “additional expenditure” where R&D is performed in a commercial production environment?
- If the application or approval letter contains criteria and methodologies in relation to R&D performed in a commercial production environment, compare criteria and methodologies used to identify additional expenditure with the method specified in the Inland Revenue approved letter and note any differences.
- Select 5 amounts of “additional expenditure” and confirm that it has been determined in accordance with approval letter. Otherwise N/A