Is it safe to switch R&D advisor?

How R&D Tax Credit advisors are using scare tactics to keep hold of clients

Over the years, R&D advisors have used a variety of tactics to try and get clients stick with their service.

In the first decade and a half of R&D Tax Credits, many advisory firms would lock their clients into contracts of up to seven years in duration. This would involve doing two historical claim years, plus the current year, plus up to four future claim years.?

This was possible because in the period leading up to the mid-2010s, many companies were simply unaware of the R&D scheme, or if they were, could not see that it applied to them.??

R&D advisors would approach companies with the promise of essentially free money from HMRC, to which the response was usually along the lines of “where do I sign up?”?Claimants would sign 25% contingency fee engagements without a second thought as to how long they were committed for. After all, this was free money.

Once the first couple of years had been completed, claimants began to look at how much they had paid out in fees and thought they could shop around for a better deal elsewhere, or perhaps their external accountant had mentioned that they could perform what they maintained was exactly the same service for a fraction of the cost.

The issue for claimants was compounded by the fact that many companies’ R&D expenditure would increase over the R&D contract period. Combined with increases to the R&D enhancement under George Osborne, claim values would sometimes double or even triple but with the company still locked in at 25%, contingency fees paid to advisors would grow significantly, often reaching levels out of all proportion to the work involved in compiling the claim.

This was profiteering pure and simple, yet many R&D advisors would fight tooth-and-nail to enforce the contracts at the original high rate with the threat of legal action if the client walked away. ??

Another trick employed by some advisors was to have a “rolling contract” whereby clients would be committed to a claim if work had “begun”. The interpretation of work having begun was often exceptionally generous, such as merely emailing the client a request for preliminary information.

All this eventually caused significant problems for some advisors who were deluged with complaints from their clients once they realised the extent of the lock-in. Some advisors had to devote considerable resources to dealing with customers who wanted to extract themselves from unreasonable contracts.

Over time, and as competition increased, the length of contract terms decreased due to R&D claimants becoming savvier about other available options.?Some later market entrants began to emerge, such as ForrestBrown, who marketed their services as not having any lock-in at all. ?“We’re so confident that you will like our service that you’ll stick with us but if not, then you can go elsewhere” was the message.

Today, a typical contract term from an R&D specialist advisor is 3 years with anything longer is generally deemed to be excessive.

However, deprived of the ability to enforce lengthy contract terms, some R&D advisors have turned to a more fear-based form of client retention strategy.

This threat is linked to an increase in the HMRC enquiry rate on R&D claims and has resulted in some advisors warning clients that, if they switch provider, they will not support an HMRC investigation for any previously filed claims that they have handled.

As an example, one R&D advisor has a disclaimer on its documentation which states that if one of its clients later submits a claim through another provider, and that this results in a re-examination of any earlier claims by HMRC, then it will not be liable for any losses that may be incurred.

The intention is clearly to create sufficient unease that the client will choose to play safe and stick with the incumbent advisor for future claims.

What they fail to point out to their client is that there are strict time limits in which HMRC can go back to raise an enquiry.

Within the statutory time limit, HMRC has the right to enquire into a return without reason or cause. However, this normally has to be within 12 months of the date on which the R&D claim was filed (although it can be slightly longer in the event of filing a claim through an amended tax return).

In order to go back further than the statutory time limit, HMRC has to show that it has made a “Discovery”.

To make a Discovery assessment, an inspector must have satisfied themselves that a return is incorrect, as well as meeting one of the following conditions:

1.????The return is incorrect due to careless or deliberate conduct by the company or

2.????HMRC could not reasonably have been aware that it was incorrect based on the return and other documents supplied with it.

If a claim is reliable and accurate, and there has been a proper and adequate disclosure of the assumptions and information, then HMRC would have great difficulty in being able to raise a Discovery assessment.

To be clear, HMRC cannot just go on fishing expeditions on previously filed claims.

What some R&D advisors appear to be implying is that an enquiry into a new advisor’s claim might result in a Discovery assessment into their own previous claim. However, as outlined above, there must be a legitimate reason for HMRC to issue a Discovery assessment.

There can only be two possible reasons why an R&D advisor would be worried about a re-examination of a previous claim.?

The first is that that the advisor believes that its claim may not be fully defensible and that another provider may adopt more reliable standards and be less aggressive in trying to maximise the claim or shield parts of it from HMRC scrutiny.

Whilst worrying, this should not be a reason for a claimant to remain with an advisor.

If by switching provider, the original advisor’s claim was found to be unreliable, then that is something for which the advisor that handled the previous claim should be accountable.

If on the other hand an R&D claim has been correctly prepared, then the advisor should have no fear about HMRC looking back and shouldn’t be concerned about contract disclaimers disavowing them of any responsibility.??

Assuming that the original advisor is a reputable firm with expert people, quality processes and reliable outputs, then the only other explanation is scaremongering the client in order to retain the business.

A recent variation on this fear-based approach to client retention is where advisors warn their clients that by switching provider, HMRC will somehow be alerted to something potentially suspicious. ?This is an attempt to make clients believe that a “safety first” approach is their best bet – why alert HMRC to something that you don’t need to?

Scare tactics such as these are unnecessary, especially as being the incumbent R&D advisor conveys some in-built advantages:

·???????They already know their client’s business and its technology

·???????The have a relationship and a rapport with the people

·???????They (presumably) have a track record of success

·???????The client knows that things “just work”

The issue is that the R&D advisory market is hyper-competitive with many new entrants having emerged in recent years and providers are understandably trying to protect their core business.

In particular, some self-styled “fintech disruptors” are maintaining that technology can be used to cut corners and reduce the overall cost to the claimant.

Accountancy firms are also becoming more confident in handling R&D claims as they begin to adopt some of the new software platforms that (allegedly) simplify the claims process.

Superficially, these low-cost services can sound attractive to claimants as they seem like they should generate potential savings.

However, an expert R&D advisory firm which employs trained technologists and chartered tax advisors skilled in the field of R&D Tax Credits should always provide a higher quality service than an automated, self-service provider or a general practice accountancy firm.

A professional advisor with high ethical standards should not fear competition so much that they need to scare clients into thinking they won’t be supported in the event of an HRMC enquiry.

Given the large amount of information freely available on the Internet, R&D claimants have never been so educated on how R&D Tax Credits work. Advisors who are anything but completely transparent about how they work will soon get found out.

Writing this article has been interesting and thought-provoking and has allowed me to set out my views but I’d be interested to hear what others think.

(With thanks to Deborah Chapple for her contribution to this article) ?

Rufus Meakin is a long-standing business development expert for R&D Tax Credits and an enthusiastic believer in raising standards across the UK R&D claims industry.