Is consolidation the answer to the UK’s R&D advisory problem?

Key Takeaways

• The R&D advisory sector in the UK is undergoing a strategic consolidation, driven by a need for advanced advisory expertise in a complex and evolving market.
• The integration of multifaceted skills in R&D advisory, underscoring the importance of technical acumen alongside tax and accounting proficiency.
• Effective R&D advisory is characterised by comprehensive, technically rigorous approaches and a readiness to engage with complex, innovative challenges.
• The ongoing consolidation trend is poised to enhance the sector’s robustness, efficiency, and compliance, fostering a competitive environment that prioritizes value and deeper client-advisor relationships.

A pressing question has emerged within the UK’s R&D advisory sector: is consolidation inevitable and necessary?

Recent years have witnessed a troubling trend – less qualified agents exiting the market under pressure, leaving a trail of unanswered claims and bewildered clients. Accountants, initially confident, are now grappling with the realisation that R&D is more intricate than first thought.

This drive has led to well-placed concerns about the quality of the advice provided resulting in an increasing number of fraudulent claims and a subsequent crackdown by HMRC to tackle error and fraud in the R&D schemes.

“The advisory market really took off in 2005 and it has grown too quickly,” says Luke Hamm, CEO of Source Advisors, previously known as GovGrant. “The accountancy market has done a sterling job of policing the sector but the industry is now saying it has gone too far.”

Hamm notes the market is now undergoing a correction in the form of consolidation in response to client needs. “Businesses are asking themselves, what is our advisory need? Is it an accountant? A tax professional? A technically minded professional? And the answer is a bit of everything,” Hamm says.

The market’s complexity, coupled with the intricate interplay between R&D intellectual property, is nudging the sector towards a handful of compliance-focused, specialised R&D firms.  These firms, adept in navigating the nuanced corridors of R&D and IP, are becoming the pillars of stability in a market rocked by continued uncertainty.

As the landscape consolidates, the question of who will lead the charge in picking up the pieced and guiding clients through has become top of mind for many. Source Advisors, previously known as GovGrant, are keen to take up the baton. With its expertise in the arena, the firm is uniquely placed to steer clients towards success in the new consolidated market.

A broken system

Research from insurance provider Markel estimates that by the end of 2023, investigations into R&D claims will have risen by 900% from levels seen in 2019.

A sharp uptick in the number of R&D claims being challenged by HMRC, coupled with stricter submission rules, could pose a significant threat to SMEs and their current advisors.

“Some people have realised they have been in the wrong hands,” Hamm says. “And there is now a need for accountants to tell their clients who they should work with.”

Hamm notes there is a strong sentiment within the market of ‘who do I trust’; this doesn’t just apply to external advisors and extends to internal R&D teams within accounting firms, facing similar scepticism.

“That is why consolidation is so fundamentally important. There needs to be a signalling into the accountancy market, all the way up to the fringes of the Big Six, that says this is the company we can trust,” Hamm explains.

Hamm suggests that those who remain independent in the wake of this consolidation may lack the requisite expertise, as the market currently offers ample opportunities for mergers and acquisitions in the R&D sector.

What does good R&D advice look like?

The future of market consolidation hinges on identifying who truly provides ‘good advice’. Yet, the R&D sector hasn’t universally agreed on what this benchmark entails.

Hamm observes a concerning trend: many businesses equate ‘good advice’ with their current level of service, not realising potential deficiencies until HMRC intervenes. This highlights a gap in awareness and standards within the industry.

“Unless HMRC have knocked on the door, businesses and their accountants have not asked that question,” he says.

Effective R&D advisory is not just about tax law comprehension. It’s about a holistic understanding of R&D’s technical and industry-specific nuances. Advisors should be experts in eligibility criteria and claim intricacies, adept at guiding businesses through the complex landscape of R&D.

“What good looks like is an incredibly robust technical report,” says Hamm. “I cannot believe, in what is now an established market, there are firms – accountants included – who have made R&D claims with just a number as opposed to any sort of technical evidence.”

Source Advisors, previously known as GovGrant, has established itself as a ‘good’ provider because it is not afraid to “get into the weeds,” as Hamm says. “A good advisor is someone who wants to have a difficult conversation because at its heart R&D is all about innovation,” he says.

In 2024, Source Advisors, previously known as GovGrant, after going through a merger of its own. “This has given us the depth and firepower to be able to consolidate, and become that someone who leads the market as the most trusted advisor” Hamm says.

Quicker, faster, better?

A leaner market means that the advisory services which survive the cut are typically those with a robust track record and undeniable expertise. This consolidation translates into businesses having access to advisors who are not just proficient in navigating the R&D tax landscape but also deeply committed to compliance and best practices.

“Consolidation will make the sector more robust, efficient and compliant,” Hamm says. “Knowing that compliance is more important, efficiency, not speed, is the win right now. And I think that is the value proposition that we will think about.”

In a market with fewer but more competent players, each advisor’s reliability and expertise become crucial. This necessitates a strategic approach towards acquisitions or mergers, prioritizing efficiency in client processes.

Hamm also foresees healthier competition, driven not only by reputation but efficiency and value. This competitive landscape will ensure businesses receive expert advice that is also cost-effective, optimizing R&D benefits while balancing tax risks and advisory costs.

The consolidation paves the way for deeper, more meaningful relationships between businesses and advisors. Tailored, consistent services aligned with each business’s specific R&D needs will foster long-term innovation strategies, creating a mutually beneficial environment for all involved.