R&D Tax Credit referral commission exposed

The recent HMRC crackdown on R&D Tax Credit claims has caused some major shifts in the R&D advisory market.

One notable development is that some general practice accountancy firms have stopped offering R&D Tax Credits as it becomes apparent that this is no longer the easy up-sell on their regular accountancy package that it was a few years ago.?

Many accountancy firms have been plagued with dozens of HMRC enquiries which they don’t have the expertise to handle.?The recent introduction of HMRC’s new “Additional Information Form” to accompany all R&D Tax Credit claims has created an extra technical requirement which is way beyond the comfort zone of many accountants.??

Rather than maintain the pretence that they are experts in Research & Development, the significantly increased risk and complexity has led a growing number of accountants to seek out specialist R&D Tax Credit advisors that they can recommend and refer to their clients.??

These accountancy firms have found the R&D advisor market receptive to the idea of referral partners. In a competitive market for R&D advisors, warm introductions from referral partners are highly beneficial as they reduce their reliance on expensive and unpredictable SDRs (Sales Development Representatives).

For the accountancy firm, the benefits of referring their clients to a specialist R&D firm are twofold:

• they are offloading their risk to a specialist in the field
• they receive a referral commission payment which can often be higher than they could generate themselves through hourly rates or a fixed fee

Reducing their risk is a very sensible move for many accountants who should probably never have been providing R&D Tax Credit services in the first place. This also helps R&D claimants who may have been unaware that their accountant is not competent to handle their basic claim let alone a complex HMRC enquiry.?

The giant “elephant in the room” however is the payment of referral commission by the advisor to the accountant for introducing their client. Such payments can sometimes reach into five figures.

The elephant in the room

The payment of referral commission is a long-established fact in the R&D advisory industry and there is nothing wrong in principle with paying for the introduction of potential business.

The problem arises when the client is not made aware of the commission arrangement.

Guidance from the various professional bodies on this issue is unequivocal: referral commission arrangements must be disclosed to the client.

The ACCA “Guidance Factsheet” for accountants’ states:

"Commissions and referral fees (and other financial benefits) create threats to compliance with the Fundamental Principles of Objectivity and Professional Competence and Due Care and could compromise your independence. If you pay or receive a commission or referral fee relating to a client (or receive other financial benefits) this creates a conflict of interest and a self-interest threat unless you disclose it".

The ICAEW “Code of Ethics” advises that:

“If a professional accountant, or an associate, receives any kind of fee, commission, payment, or benefit (“the commission”) in connection with the referral of the professional accountant’s client, the professional accountant shall obtain explicit written consent to retain the commission. This requirement exists regardless of the amount of the commission”.

The ATT and CIOT "Professional Rules and Practice Guidelines" says:

"Where a member gives advice to a client which, if acted upon, will result in a member receiving commission or other reward from a person other than the client, a member should inform the client of this fact as soon as appropriate but no later than at the time the advice is given, and inform them of the amount of the commission or reward which a member expects to receive"

In my conversations with several experts in the field, it is clear that this guidance is often not being followed and that commission payments varying between 10% and 50% can remain undisclosed to the client.

It easy to see why an accountant might prefer not to disclose the amount of commission generated from their referral to a client.

For an R&D claim valued at say ￡100,000, an R&D advisor might charge a contingency fee of 20%. If the R&D advisor then pays the accountant a commission fee equating to 20% of the advisor’s fee, then the accountant will receive ￡4,000 in commission. The accountant’s client might well be upset at the idea that their accountant has pocketed ￡4k merely for sending an introductory email.

For the accountant, there is little downside. They have off-loaded their risk to a third party, gained a referral fee which may well be in excess of anything they could have earned had they handled the claim themselves, and they have a happy client who believes their accountant has scoured the R&D advisory market to identify the best solution for their individual needs.

Whilst it seems that all parties should be satisfied with this arrangement, there are some potential problems which could occur.?These are principally to do with the lack of transparency if the accountant has not disclosed the commission payment to their client.

1.???The commission level could dictate the referral partner

To put it bluntly, the accountant may refer the R&D advisor which pays the most commission rather than one that provides the best service.?This would create a clear conflict of interest.

Additionally, it can be assumed that the higher the commission rate, the less likely it is that the accountant will inform the client of the arrangement.?There is a world of difference between an advisor giving, say, a bottle of wine as opposed to a cash payment of ￡5k, ￡10k or even ￡20k. ?

With a high rate of commission in place, there would be little incentive for the accountant to ensure that the advisor’s performance was optimum or that better options might exist in the market (other than those which offered an even higher commission rate).

2.???Blanket referrals are not aligned to an individual client’s requirements

When an accountancy practice has partnered with a single R&D advisory firm, it will make blanket referrals only to that particular firm. However, not every client might be a good fit for their preferred advisor.

For example, many R&D advisors specialise in certain sectors such as software development, engineering or construction. ?By referring all their clients to a single advisor, their clients may end up engaging with a firm that has little expertise in its field.

As Dean Neaves, Senior Manager, Quality Assurance Department at the ICAEW has written: “If you make blanket referrals and don't actually consider the appropriateness of referring each individual client, then you run the risk of being in breach of the Code of Ethics.”

By not disclosing the commission arrangement, the client may ultimately end up working with an inappropriate R&D firm under the misapprehension that their accountant has altruistically identified the best R&D advisor relative to their needs.

3.???The R&D advisor increases its fee to compensate for the commission

If you are an R&D advisor faced with giving away a large slice of your fee to your introducer, there is an obvious temptation to increase the fee to compensate for the loss.

This could result in the client paying more than they should, especially if they are unaware of the commission arrangement.?

The accountant may well try to encourage the client to work with their preferred advisor by claiming that they have a strong working relationship that will make the claim process much smoother and less problematic than if they use an advisor that they haven’t worked with before. (After all, the last thing the accountant would want is for a different advisor to muscle in as that would mean zero commission).

By telling the client that they have a strong relationship with the R&D advisor, the client may be less likely to negotiate the fee with the advisor as they would assume that their accountant has already obtained the best deal available on their behalf.

4.???The momentum towards filing claim can be difficult to stop

I’ve written before about what I call “the momentum to make a claim”. This is where a process has been set in motion where everyone is working towards - anticipating even - that an R&D claim will be filed, regardless of actual eligibility. In some circumstances, this momentum can prove virtually unstoppable.?

This could be a particular problem if the accountancy firm provides an R&D advisor with their full client list, regardless of whether they are qualifying or not (the “fill your boots” scenario).

The advisor would then pick over the list, making contact with any client that might remotely be interested in discussing filing an R&D Tax Credit claim. The seeds of a claim are sown and the momentum begins to build.

This situation is not as fanciful as it might seem.

One accountant told me in confidence about an R&D advisor that had approached an accountancy practice and threatened that they would obtain their full client list from a public database such as FAME and target all their clients directly so the accountant may as well have a blanket referral agreement with them rather than be cut out of the loop.

Conclusion

It is helpful to understand why referral arrangements are particularly attractive to the R&D advisory sector.

The “buying window” for R&D Tax Credits is notoriously narrow. Sometimes the opportunity to sell is only open for one month in every three years before the claimant gets contractually locked-in by a competitor for a further three years.

In this situation, the ability for an R&D advisor to be alerted by an accountant that their client is currently in the market for an R&D advisor is extremely valuable information.

There is nothing wrong with having this type of partnership, nor even the payment of referral commission. This definitely has a place, even in the R&D Tax Credit advisor market.??

The problem, as I have identified, is the lack of transparency when it comes to informing the client of the arrangement.

In this article, I have tried to identify some of the problems that can arise when (a) the commission is not declared and (b) the sums are material and I hope people will understand my position.

I would really welcome a debate on this so please let me know what you think.

Rufus Meakin helps companies to 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.