It’s not always a fairy tale of R&D Tax Providers Fairytales, cowboys and pirates are not always associated with good practices, even if they do follow the pirates ‘Parley’ – “to meet in order to discuss something, especially how to end an argument or a war”.
This doesn’t sound like a great start to an article on R&D tax credits, but with rising R&D claims and in excess of £5 billion being claimed from HMRC, there are many providers out there that want to support you to make a claim. This blog post will give you an idea of what to look out for in a good provider – of which there are many – TBAT included and we’ll explore what makes a provider good, bad, and ugly!
R&D tax credits can be a huge benefit to companies that claim either under the SME Scheme or the Research & Development Expenditure Credit (RDEC) Scheme. Carrying out Research & Development for new products, software, product improvement or process development can be risky and costly, so R&D tax credits is a way the Government, via HMRC, mitigates the risk by allowing companies to claim a proportion of their eligible costs for either a reduced corporation tax bill or in certain circumstances cash back from HMRC.
There are many good R&D tax credit providers out there, that either operate nationally or locally. These will provide a report, maximise the claim and help you if HMRC come back with any questions. The focus of this article is to address the less savory practices we’ve come across in the way some providers approach and operate with clients.
Does the provider you’re talking to offer more than just R&D tax credits, or are they a one-trick pony? Offering other services, such as grant funding, capital allowances, innovation strategy development shows they have a strong pedigree and a range of skills that could provide additional revenue streams.
Many times we hear of pressure selling techniques, time-limited offers, companies being bombarded by cold calls, or tying in clients for 4 or 5-year contracts that have penalties for withdrawing early. We advise that companies should always do their due diligence on who they’re going to work with and always read the T&Cs to check there are no hidden penalties. At TBAT we primarily offer 1 to 3-year contracts – never 5, and there are termination clauses both ways.
Often we get asked if R&D tax credit providers are regulated, and as it stands the answer is no. However, TBAT Innovation are an attending member of the RDCC (R&D Consultative Committee) run by HMRC, therefore, we’re aware that whilst regulation is not planned, a code of practice is being agreed between the accountancy membership bodies and HMRC. This is an extension of the accountants PCRT (Professional Conduct in Relation to Taxation), which outlays fundamental principles and standards for tax planning by accountants. The code of practice will cover all tax advisors and specifically R&D tax credits providers, giving good practice advice on such areas as AML (Anti Money Laundering), CPD (Continued Professional Development), transparency, misleading claims, technical expertise, and dealing with clients with courtesy and consideration.
Additionally, one of the major new rules introduced to improve the professionalism of R&D tax providers is the Fifth Money Laundering Directive, which came into law in January 2020. This requires that ANY tax advisor, and that includes advice on R&D tax credits in any capacity, must carry out Anti Money Laundering (AML) checks on their clients annually. Providers that have failed to do this, or performed them incorrectly have been fined by HMRC, as AML checks are a legal requirement. Four companies were fined in 2020, including one company for a whopping £23.8m for not performing AML checks. If your provider says AML checks are not needed, it’s a sure sign they’re either a bad or ugly provider!
R&D tax credits providers are engaged for 2 basic services, writing up the technical report as evidence of the R&D performed and analysing your finances to identify all eligible costs that can be utilised in a claim.
This is a detailed record of the R&D the company has carried out. This should be detailed enough for HMRC to understand the uncertainties faced, the problems encountered, how these problems were resolved, and how this advanced science and technology.
It’s critical that your R&D tax provider has technical experts that understand what development work is being done. If you’re having to explain to a layperson what the R&D is then you’re not being supported. The technical expert’s job is to help identify which projects have elements of R&D in them and which don’t.
There are a few other warning signs of potentially ‘ugly’ R&D tax credit providers when it comes to technical expertise.
Some providers will use salespeople to cold call potential new clients, and while they may tell you how much you can get back for doing R&D – if the person that’s called you doesn’t ask any qualifying questions during your call, it’s clear you’re not speaking to a technical expert that will maximise your claim!
Additionally, make sure you’re going to be involved with reviewing your technical report before submission to HMRC. We’ve heard of providers that maintain ownership of any reports generated and on occasion, providers that don’t allow their clients visibility of the reports at all!
It’s the client’s risk if HMRC start an enquiry, therefore you should always read the report for accuracy before signing that it’s a true and accurate reflection of the R&D undertaken.
Another warning sign of a poor quality provider is if they ask a client to assist them in writing sections of the report or provide a format to write the entire technical report themselves, yet still charge a hefty fee. This is what you’re paying them for, so you shouldn’t be expected to do their job for them.
In our opinion, the key to a successful claim is that you’re challenged about the R&D you’ve undertaken in order to winkle out the real gems of innovation. Objectivity can be lost if clients write their own reports, they can often view the challenges overcome through rose-tinted glasses and play the innovation down.
The financial analysis is the core of any R&D tax claim. It should be a balanced counterpoint to the depth and clarity of technical work undertaken and calculates how much you can claim.
The rules around what costs can be used in the claim are specific; therefore, your provider should make sure only those are used. Bad practices include using rent and rates to bolster a claim, as well as claiming 100% of employees time going towards R&D.
HMRC doesn’t like to see 100% of anyone’s time and salary going to R&D as nearly everyone in the business will have other activities that don’t contribute to R&D. Ideally employees should fill out timesheets to show where they’ve contributed time towards R&D or alternatively have a methodology to calculate their time contribution.
Some providers will do what I call ‘death by spreadsheet’. They send a spreadsheet and ask you (who may be quite inexperienced in this role) which costs have been spent on R&D. This is being lazy as they’re not exploring all costs that could be legitimately used to maximise your claim.
Remember that if HMRC ask you to justify your claim, you need to be able to clearly identify where every cost has come from. If your claim provider compiles the figures with no feedback from you to agree and edit them, it could leave you very exposed!
While this could be a commercially sensitive subject, it’s an important indicator of whether you’re working with a good, bad, or ugly R&D Tax provider. We’re aware of providers charging anywhere between 5% and 30%. In our opinion, anything over 20% is ripping you off.
The average benefit for a SME claim is £57,000, so charging up to 30% of that claim would cost £17,100 – a huge chunk of money, and what are they providing for that? In addition, usually, a larger claim makes that fee percentage negotiable.
At the other end of the scale, be wary of too low a figure. If the R&D tax provider is going to charge you £2,000 for a £57,000 claim, what level of support are you really getting towards evidencing and maximising your claim? You get what you pay for.
Once the report is done, you’re happy with it and the all-important calculations are ready, do they get sent to you or to your accountant for submission with your accounts? In addition, does your R&D provider help your accountant and check over the CT600 and tax computation to make sure it’s accurate?
While reviewing clients previous claims, we’ve seen mistakes being made – this is a specialised area, and not all accountants or their software are used to it, so mistakes do happen. A bad practice we’ve seen is when R&D providers make companies submit their accounts first time without the R&D and then re-submit with the R&D claim. This is said to be easier for the company, but it’s not. It makes the company pay an inflated corporation tax bill (if profitable) and then wait many weeks to get a repayment, taking valuable cash flow out of the business – that could be £10,000s or £100,000s for larger claims. This helps only the R&D provider as the repayment will likely come through their client account, they will snaffle their fee and pass the rest to the company.
A tell-tale sign of a good R&D Tax provider is if they’ll handle any enquiries from HMRC on your behalf – free of charge – be wary of a provider that doesn’t offer this. Queries can be time consuming and confusing – as the provider wrote your claim report, they should handle any queries about it. Ideally, it should be robust enough to explain in full, what you have done in your R&D projects and answer any queries HMRC may have. If not, HMRC can open an enquiry into the claim and previous claims for a company.
Before signing a contract with a provider, please consider ‘Have they got experience of handling HMRC R&D tax credits enquiries?’ HMRC are employing an additional 100 compliance officers to allow them to do more to explore claims. In 2018 HMRC thwarted a £300m fraud scheme, but they also want to know that your company is performing genuine R&D. Just because HMRC have processed your claim, does not always mean they’ve approved it. HMRC have the powers to explore any area of your business going back several years if they find something untoward.
R&D tax credits are a great support for companies carrying out R&D and R&D tax credits providers provide a recognised and valued role in helping companies through the process to claim. Make sure that you understand the services your provider is offering, are staying legal by carrying out AML checks and that they’re not overcharging or making you do too much. There are many reputable providers and some more roguish ones out there that are just trying to cash in. Choosing the right partner for your claims can end in a happily ever after.
The HMRC R&D Tax Credits Statistics have been published for September 2021 and it looks like there is good news regarding the uptake of the two HMRC R&D tax reliefs (SME & RDEC) for the period ending March 2020. Claims continue to be focused around the London and South East areas, representing 35% of companies and 49% of the total claimed in March 2020.
The likelihood of receiving a HMRC R&D Tax Credit Enquiry is rising and we want to help! As a claimant business, legally it’s your responsibility to be able to respond appropriately to defend your R&D Tax claim – but a good R&D Tax Consultant will be there to help you defend your claim.
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