Arm’s Length

To avoid invoice inflation (and therefore excessive tax offsets), R&D expenditures must be at market rates. This can be proven if the service suppliers has published rates or can show other contracts being conducted at similar rates. Where no such data exists (such as rent charged), then a comparison of similar arrangements (such as commercial leases for similar properties in the same or equivalent areas) would need to be made.

In the case of payments to associates, this means mark-ups or profit shares need to be excluded from the R&D expenditure. This does not mean that for other commercial reasons they cannot be charged between companies, it just means that the must be excluded from R&D expenditure calculations. In the case of the property example, that means the cost to hold the property (as incurred by the property owner) may be the only costs able to be claimed.