Do R&D Tax Credit “claim farms” really exist?

Recently there has been a proliferation of mysterious adverts popping up on various social media platforms touting unspecified “free cash rebates from HMRC” for small businesses.

Here is a typical example that appeared last week:

“Dentist? Claim a Tax-Free Cash Rebate Now.

If you are a UK Business and Limited Company, turning over more than ï¿¡250k per annum and have filed at least 1 years set of accounts to HMRC, you may be eligible to a tax-free credit and lump of cash.

To find out more and for free if you can claim, fill out our contact form by CLICKING HERE”

Many people in the R&D Tax Credit advisory field will be familiar with this kind of pitch to small business owners who are often desperate for any cash they can raise. Whilst these adverts are actually selling R&D Tax Credits, intriguingly, R&D Tax Credits are never mentioned by name.

So why would R&D advisory firms advertise on social media with cryptic messages about some vague tax break??

I have been approached by several R&D advisors asking for my views on this so I did some research into how these firms operate.

Painful though it is for many R&D advisors to accept, the fundamental problem is that the pool of genuine R&D Tax Credit claimants is limited and the majority of eligible companies are already making claims.

For some R&D advisors with ambitious growth plans, the solution to this problem had been to expand the market well beyond companies undertaking cutting-edge R&D into "blue ocean" sectors with marginal R&D. These sectors could be targetted with unscrupulous marketing messages such as how companies in industries such as scaffolding or dentistry were "owed" ￡84 billion in unpaid R&D Tax Credits or that “95% of eligible companies aren’t claiming R&D”.

(Interestingly for the R&D advisor, eye-watering contingency fees could be charged to companies that had never heard of R&D Tax Credits, compared with more savvy tech start-ups who are much more willing to negotiate downwards on fees).

But even this approach is now running out of steam. With the recent HMRC clampdown and Treasury cutbacks, it is now clear that we have reached "peak R&D".

There cannot realistically be many companies doing R&D that aren’t aware of R&D Tax Credits. In fact, many CEOs and CFOs report being hounded on a daily basis by cold callers and email spammers.

This has led to R&D Tax Credits becoming notorious for every dubious sales and marketing trick in the book.

R&D Tax Credit “claim farms”

The emergence of the alleged R&D Tax Credit “claim farm” is one recent development.

So-called claim farming originated in the accident compensation industry and is a method of drumming up claims for financial gain.

According to one description of claim farmers from a prominent legal firm, “the prospective claimant will be contacted and encouraged to pursue a claim. The claimant is enticed by the promise of compensation payments, requiring minimal effort”.

Due to the differences between consumer and business markets, it is not possible to replicate the exact methodology used within the accident compensation industry to R&D Tax Credits.?

There are however certain similarities.?

Whilst R&D Tax Credit claim farms are unlikely to use text messaging to contact prospects, industrial scale email and social media marketing is rife.?But rather than using specialist business databases such as Beauhurst to identify prospects likely to be undertaking R&D, claim farms can be found soliciting random companies through consumer-focused social media platforms such as Facebook and Instagram.?

Any mention of R&D Tax Credits is carefully avoided so as not to deter companies who may have looked into applying before but decided they weren’t eligible.

The business of attracting prospective R&D claimants is sometimes performed by third-party marketing agents rather than the company actually producing the claims. Prospects are then passed over by the agent for a fee.?

Even for R&D claims companies that employ their own in-house marketing teams, the level of R&D knowledge can be exceptionally poor.

Reading from a script, telemarketers are novices with little practical knowledge of R&D and are unable to assess a company’s eligibility for R&D Tax Credits.?Inevitably, even the most unlikely R&D candidates are passed over for qualification to an R&D specialist.

As in the accident compensation industry, R&D claims can sometimes be submitted without the claimant seeing any documentation, or even being aware of what is being submitted to HMRC.

Business review website Trustpilot promotes client reviews of R&D advisory firms along the lines of “we had a 15- minute chat with such-and-such advisor and the next thing we knew, the money from HMRC was in the bank”.?In effect, the claimant has little knowledge of the R&D claim being submitted in its name.

My investigation

Many R&D advisors have become increasingly concerned about these developments, and in particular by the way the growth of this type of firm has negatively impacted the Treasury’s view of the R&D schemes, so I decided to do some research of my own to see they operate.

I asked a friend to respond to one of these online adverts by providing her contact details.

There was no mention of any company name on the advert so she had no way of knowing who had placed the advert or even if it was promoting R&D Tax Credits.?

My friend runs a small business importing toys from Asia. It has 3 employees and less than ￡1m in turnover*. There is no R&D taking place. Any R&D that might have taken place would have been done by the Asian manufacturer with the costs being incorporated in the finished product rather than being charged to my friend’s company. She is completely ineligible for R&D Tax Credits.

Having submitted her details through an online form on a well-known social media platfom, she was contacted the next morning by a telemarketer using a mobile phone number.

It wasn’t immediately apparent that the telemarketer was even selling R&D Tax Credits as the initial questions were all about the turnover of my friend’s business and whether she had filed accounts at Companies House.

Once it was made clear that R&D Tax Credits were the “free cash tax break” in question, the telemarketer began to explain how my friend could benefit.

Firstly, she was advised that:

“If you’ve made any changes or modifications to any products, processes or systems within the last two financial years then it would be very likely that you will be eligible for this”

This is a stretch. Whilst changes or modifications to existing products may be eligible for R&D Tax Credits, a claimant must be seeking an advance in science or technology as well as attempting to resolve technical or scientific uncertainties. Many companies modify or change products all the time without the work being R&D, so it wouldn't be true to say they would be “very likely” to be eligible.

The telemarketer then went on to explain how his firm would construct an estimated R&D claim value:

“We look at five key areas of expenditure from your full accounts and we have an algorithm system in-house that will compare your turnover and expenditure to other companies of a similar size to yours and generate a free estimated figure of what we believe we can actually achieve”.

This is a very dubious approach as the estimate is not produced by analysing the company’s potentially qualifying R&D. Instead it is produced by benchmarking the accounts against similar-sized companies in the same industry. It takes no account of whether the prospect is undertaking genuine R&D or not. Indeed, my friend wasn’t asked once about R&D during the entire 20-minute call.

At some point, the telemarketer has to admit that the opportunity to claim R&D needs to be qualified by a technical analyst who apparently “works very closely with HMRC” to identify qualifying projects.

According to the telemarketer:

“The rule of thumb here is for every ￡30,000 to ￡40,000 within the cost estimate we need at least one to two qualifying projects.?If the estimate comes back at ￡50,000, we need to find one or two qualifying projects within your business that qualifies as R&D”.

This illustrates how the R&D firm is looking at the costs first and then trying to construct R&D projects that meet the costs.?It is reasonable to assume that having a “rule of thumb” is due to trying to meet some HMRC parameters which the adviser believes will reduce the risk of any questions being asked further down the line.

In reality, there is no HMRC “rule of thumb” which R&D claimants have to meet. An R&D project is what it is. It is completely incorrect to benchmark a company against what similar companies may be doing to come up with an estimated R&D cost and afterwards “find one or two qualifying projects”?to match those costs.

“But Rufus, it's just marketing!”

No, I don’t think “it’s just marketing” is a reasonable excuse for such practices.?

I will let people make their own judgement on whether this particular company is a genuine claim farm, but in my opinion some of the steps involved in the sales and marketing phase do not inspire confidence that any follow-on R&D claim process would necessarily be reliable.

To be totally clear, there is no suggestion that the sales representative or his company deliberately intended to encourage the submission of a bogus R&D Tax Credit claim. My intention is only to highlight the kind of questionable sales tactics used by some companies in the R&D Tax Credit claims industry.

The problem with this approach is how it can subtly affect the way the prospect is viewed by the R&D advisor.?

Expectations have been raised by both parties and a momentum has been created to work towards submitting an R&D claim which will result in a financial gain for both parties.?

The telemarketer quoted my friend a contingency fee of 35% so there is a clear incentive for the R&D advisor to “find” that R&D is taking place.?

Qualifying out the prospect will inevitably be seen as a retrograde step so there could be an impetus to encourage regular business activity to be incorrectly submitted to obtain R&D Tax Credits.

The prospect has been told from the outset that, as long as it is making any kind of changes to its products or services (as many businesses routinely are), it will “very likely” be eligible and this is unquestionably what all parties are working towards. Anything less than a successful claim would probably be deemed a failure.

To repeat, there is no suggestion of impropriety by this company or that it was deliberately breaking any rules.

Nevertheless, I think most people would agree that there is something about this entire sales process that just doesn't feel right. The idea of using sharp practices to set up a qualification call with a supposed technology expert, despite the company clearly being ineligible for R&D Tax Credits, makes me uncomfortable.

The obvious conclusion is that there may well be financial pressure placed on the technical side to pursue an R&D claim even when the eligibility case is marginal at best. Most people in the R&D advisory field have come across the notion of “dressing up” non-qualifying projects to meet the BEIS guidelines for R&D Tax Credits. My view is that this sales approach is not conducive to always producing genuinely qualifying R&D claims.?

It is a shame that some in the R&D advisory industry and accountancy profession appear to see R&D Tax Credits solely as a tax wheeze to be exploited for their own enrichment.?But the Treasury and HMRC set the parameters so it’s hardly surprising that entrepreneurs and clever accountants have spotted ways to game the system – breaking if not always the actual letter of the guidelines, then certainly the spirit in which they were intended.

In my opinion, the key to long-term success for any company in any industry is to ensure that integrity is built into every stage of the process.

Unfortunately, there are now so many of these kinds of marketing-led R&D advisors that an obvious problem has been allowed to build up.?

The Treasury’s recent cutbacks to R&D Tax Credits are the result.

* Some minor details have been changed to protect the anonymity of the parties involved.

Rufus Meakin is a specialist in helping companies prepare complex R&D Tax Credit claims where robust HMRC compliance is essential.

If you would like to discuss any aspect of your R&D Tax Credit claim then please feel free to call me on 0794 110 3285.