All that glisters… R&D Tax Credits
What follows may seem designed to put off business owners from pursuing R&D Tax Credits so it feels important to say up front that we are highly in favour and encourage our clients to explore them.
However there are some hidden dangers that small business owners may be glad to be aware of. In this blog we attempt to explain them.
An unregulated industry
R&D Tax Credits are a boom industry because they are one of the most generous tax breaks available. This has attracted a huge number of service providers offering the specialist knowledge to submit a claim for a % of the tax saving.
Typically these tax advisers are specialists. High St accountants and even mid tier firms do not have the resources to train and retain the competent staff required. In some cases the business owner’s accountant recommends a firm but in other instances the R&D Tax Credit specialist is reaching out to business owners with their own marketing.
To the business owner it looks like a risk free engagement. If the claim is unsuccessful there is nothing to pay. What the business owner may miss is that this is an unregulated industry and the problem is that the business owner nor their accountant may be equipped to know whether the claim submitted would withstand HMRC scrutiny.
conflicts of interest
Meanwhile the R&D Tax Credit specialists have an incentive to maximise the claim because their fee is based on a % of the tax saved. Whilst most claims will still be processed by HMRC without challenge they choose a proportion to look into.
At this point an unscrupulous R&D Tax Credit firm will wash their hands of the claim leaving the business owner to seek expensive advice elsewhere and likely pay back tax and stump up penalties.
At the limit the business owner’s accountant has also fallen into the same trap. Most R&D Tax Credit firms pass on a % of their fees onto the accountant who introduced them as a referral fees. At Co- we have been approached by dozens of firms hoping to make this arrangement.
The accountant now also has an incentive for the claim to go in and whilst most accountants are fundamentally honest there is now a conflict of interest.
sleights of hand
Another problem is that in the excitement of engaging an R&D Tax Consultant with a tax break on the horizon, the business owner may not be paying full attention to what they will pay.
Common problems include:
Being locked into multi-year contracts.
Fees. Some firms now base fees on ‘expected’ tax saving or as a % of ‘qualifying expenditure’ rather than actual tax saving.
Corporation Tax Returns. An R&D Claim requires Corporation Tax Returns to be submitted. This is often an important part of the process but it may not be included in the agreement.
Scope of Work. Increasingly business owners or their accountants are being asked to complete the background work of the claim.
Risk mitigation
The best way to avoid these problems is check out the reputation of the firm you are considering working with.
Ask whether the service includes support in case of HMRC enquiry and whether there is any limit to that support. Make sure it is in the contract. Understand the scope of work, the fee basis and the length of your contract.
Find out if your accountant has done their due diligence if they are recommending someone to you.
We are glad to say that the government and HMRC are aware of some of the problems outlined above and commissioned a consultation in March 2021. We hope this will result in a regulated industry.
Our Approach
At Co- we have a recommended R&D Tax Credit consultancy supplier: ForrestBrown with an excellent reputation.
We are grateful for their insight and support in the area of R&D Tax Credits and recommend their blogs on the issues raised above:
We have no referral fees in place with ForrestBrown instead clients either choose a reduction on their fees from ForrestBrown or if feeling philanthropic can donate the saving to our ‘Pay it Forward’ fund.