R&D tax credit advisers have a bad name among accountants. In fact, we’re often hated. Why? Because as an industry, we’ve let them down. Rather than bringing something positive to the relationship between an accountant and its client, consultants often end up damaging it.
There are too many spurious advisers out there, promising payouts based on shaky information and putting businesses at risk by submitting erroneous claims. In short, while good consultancies exist, many are attempting to undertake claims without a full understanding of the process – or, indeed, the repercussions of getting it wrong. As a result, accountants have been left holding the book on inaccurate claims.
How do I know this? Because accountants tell me. I’ve heard all sorts of shocking stories about poor practice and occasionally outright fraudulent activity. There’s also plenty of hard evidence to prove some consultancies haven’t lived up to their promises.
Last April, HMRC introduced new rules to combat substandard claims and it recently uncovered a high-profile instance of fraud, said to be worth as much as £300m to the public purse. As a result, HMRC has restructured their R&D team to focus more resources on compliance. As a result, more companies than ever have approached ForrestBrown for help with enquiries in recent months.
What’s causing the sour taste?
What’s going wrong and why is the quality of claims so hit and miss? The heart of the problem is ignorance. While there are some fraudsters out there, most of the time it’s just a matter of people having a go at a claim thinking there are no consequences of a poorly constructed one.
The sector, like the tax industry as a whole, is only partially regulated, leaving it open to anyone who wants to try their luck. Unfortunately, accountants who choose to collaborate with a consultant that gets it wrong often have to pick up the pieces for their clients.
We’ve seen cases where an adviser has submitted an R&D claim without a business or its accountant ever seeing the paperwork. Alternatively, the consultant doesn’t spend any time engaging with the company’s technical staff to understand the innovation taking place to ensure the claim is correct.
In some instances, advisers simply don’t understand tax law and don’t apply specific statutory provision. Or they act aggressively, trying to claim 100 percent of the company’s staffing costs. There are also some occasions where a claim for one client is copied and pasted for another – save a few minor details. This isn’t just lazy, it’s hugely damaging and, in some cases, where errors are picked up by HMRC, companies can face significant bills for underpaid tax.
These are also easy errors for HMRC to spot and challenge, so it is these companies who often find themselves facing an HMRC enquiry and being underprepared for the questions asked. Worse still, many of these companies find that they cannot rely on these advisers to help with the enquiry, despite promises to the contrary in the sales pitch.
At a time like this, with such huge pressure on firms to stay afloat during the coronavirus crisis, the consequences of a poor claim could be the difference between a business staying afloat or going bust.
We’ve encountered many examples of the consequences of poor R&D tax advice. For example, we were approached by a software business which was facing this exact challenge. The business had made three claims with an adviser. The first claim missed the deadline for submission – an indication of poor management. The subsequent two led to quarter of a million in credits, which the company received and re-invested into their business.
A year later an enquiry led to the business facing having to repay the money in full. The claim had included expenditure that didn’t qualify, such as rent. It also lacked the technical detail required for a robust claim. Without swift action, the business would have folded.
Our team was able to step in and resolve the enquiry, rescuing a proportion of what was owed, plus preparing and submitting a new claim for the following year at the same time, which offset the repayments from the previous errors made. The net result was that the business could continue. But their adviser had left them high and dry. They’d made a poor claim and then been unable to support their work when HMRC asked them to.
Another example was a mechanical contractor for the construction industry. It has responded to a cold call about making a claim. The firm hadn’t heard of the R&D tax credit system and was advised it was low risk – either a claim would be granted or it wouldn’t – with the consultancy taking a cut if it was successful. The firm went ahead and was told by the adviser that they would receive a huge sum from HMRC. They also faced an HMRC enquiry which the adviser was unable to manage. The consultant – inexplicably – blamed the mess on Brexit and then promptly disappeared.
HMRC is taking action, but it’s a challenge. While the tax authority is running a consultation on how to improve standards of tax advice, ultimately, HMRC can only assess the claim in front of them, which comes from the business (usually via their accountant). The consultancy doesn’t always leave a trace on the process, making it hard for HMRC to monitor which advisers are regularly submitting poor claims.
How can accountants find a good R&D tax adviser?
It can be difficult. I’m on HMRC’s R&D consultative committee along with about 90 others. As an industry veteran, I can look for unrealistic claims on adviser’s websites, or spot technical errors in their publications, but most companies and even accountants struggle to sort the good from the bad. Nevertheless, given a little time to do some homework, accountants can find the right fit. It’s just a matter of knowing what to look for.
One clear way to can tell which the good ones are is to look for membership of a relevant professional body, such as the Chartered Institute of Taxation, which means they will be signed up to the appropriate professional guidelines. If an adviser isn’t bound to these, you need to ask why. Good advisers will also be clear about their anti-money laundering and GDPR policies.
Another factor that signifies a good adviser is the way it is set up and run. Tax expertise is essential, but does it also have ex-HMRC inspectors working for it? Ours tell us that they wouldn’t work with organisations they didn’t trust. Does it have sector specialists who can really get under the skin of innovation in particular industries? Does it have a dedicated quality assurance team to manage risk and maintain quality standards?
It’s also vital to look for transparency and high levels of collaboration. An R&D tax credit is intrinsically linked to a tax submission. If an adviser isn’t willing to be open, spend time with a client, liaise with their accountant and take the process seriously, you should be asking why.
In summary, it’s about time something changed. Many R&D tax credit advisers only have themselves to blame for the way they’re seen by accountants. But not all are bad – and we’re trying our very best to ensure they’re not tarred with the same brush.
For our part, we’re working with the Chartered Institute of Taxation to develop guidance for advisers to stop those just out for a fast buck. We’re hoping to publish this year and we also hope that it’ll be endorsed by HMRC as the standard they expect. Because we need to stand up for those consultants who work hard to make a difference and to one day ensure we can all be proud of the work we do as a sector.
What is an R&D tax credit?
Research and development tax credits are a government incentive designed to reward UK companies for investing in innovation. They’re a valuable source of cash for businesses and support significant growth. HMRC itself found that for every £1 of tax foregone, up to £2.35 of additional R&D is stimulated.
Why would an accountant need to collaborate with an R&D tax credit specialist?
Bringing in a well-regarded firm can deliver large financial benefits and enhance your relationship with clients. The key is finding the right one.
Questions to ask when choosing an R&D tax credit adviser.
- Do they have relevant professional indemnity insurance and are they registered for anti-money laundering supervision?
- Are they accountable to a relevant professional body such as the Chartered Institute of Taxation? What specialist experience and qualifications do their team have?
- Do they have sector-specific expertise?
- Can they offer references, and have they received positive testimonials from their clients?
- Do they adhere to HMRC’s agent strategy guidelines and therefore demonstrate a good working relationship with HMRC?
- Do they avoid generic questionnaires and templates?
- Will they visit your business in-person?
- Will they explain their findings and share their final reports with you for your final approval?
- Will they share their findings with your accountant and work with them in a transparent way?
- Will they defend the claim should HMRC open an enquiry as part of their fee?