HMRC's poor regulation of R&D tax relief is harming SMEs
Fraud and error in the R&D tax relief scheme are making headlines. HMRC need to regulate the scheme more effectively - but what can advisors do themselves to improve standards?
Almost everyone working in R&D tax relief is painfully aware that the market is largely unregulated, with fierce competition between providers and a very uneven playing field. Conscientious advisors who stick close to the rules often despair as they watch other (less knowledgeable or scrupulous) advisors play fast and loose with the scheme, making big profits in the process.
But it’s not just R&D advisors who suffer from a lack of regulation; SMEs are arguably even more affected, as they are the ones who get penalties when things go wrong with their claims.
This weekend, The Times published a number of articles (behind a paywall) that report on the scale of fraud and error in the R&D scheme. While this isn’t surprising news to advisors, many of our members have had to field calls from anxious clients who’ve seen these write ups. They’re worried about the quality of their own claims, and the risk that they themselves are part of the problem described.
Poor R&D regulation means a commoditised market
The biggest issue with a lack of meaningful regulation is that almost anyone can call themselves an R&D tax expert and claim a 100% success rate. Barriers to entry are so low that a quick Google search for ‘R&D tax credits’ brings up hundreds of advisory companies, many claiming a long track record, unparalleled success and an abundance of expertise in different areas of technology.
For your typical time- and money-pressed SME, it’s a bewildering set of options. Faced with so many R&D advisors saying broadly the same things and promising the same rosy outcomes, many SMEs view R&D as a commoditised service. They then start shopping around, playing advisors off against each other in order to get the most competitive price.
Others see the negative articles, and struggle to find an advisor who they trust, and decide to give up on the whole thing as a bad job. That leaves businesses without valuable support for their R&D work and undermines the value of the scheme.
Poor regulation means good quality advisors are suffering
Shopping around might be good practice when buying a new car, but it doesn’t work nearly as well when choosing an R&D provider. While SMEs might think they’re getting a good deal on the same service and outcome, the truth is that advisors vary hugely in their level of knowledge, experience, and willingness to stay close to the rules and spirit of the R&D scheme.
This tendency for SMEs to vote with their wallets means that many give their business to the consultant who promises them the biggest return at the lowest possible fee. Unfortunately, the people who make the biggest promises and who are most aggressive on price also tend to be those with a high tolerance for risk. And that usually goes hand-in-hand with a somewhat elastic attitude towards eligibility.
In other words, because there’s no formal, regulatory framework for assessing, certifying, and monitoring the quality of R&D advisors, SMEs buy on price – and that leads to more risk-taking and price-wars between advisors, with a corresponding reduction in claim quality.
How to improve regulation and standards in R&D tax relief
While, historically, SMEs may have been happy to shrug their shoulders and let their advisor deal with HMRC’s questions, this attitude is starting to change. HMRC’s response to fraud and error has come in the form of well publicised changes to legislation. These take effect for claim periods beginning on or after 1 April 2023, and are designed to improve compliance, accountability and transparency within the R&D scheme. While this is a step in the right direction, the R&D tax relief market is crying out for regulation that brings more consistency to how R&D advisors advertise their services and prepare claims.
An alternative and perhaps faster way to improve the R&D market would be to establish specialist, independent, accredited training programmes specifically tailored for R&D advisors. This would give advisors a way to evidence a sophisticated understanding of HMRC’s rules and how to apply them in practice. That would then give SMEs more to think about than just price, so their first question would no longer be "How low are your fees?" but rather "How can I trust you know what you’re doing?"
Our recent article 5 ways to make your R&D service stand out from the crowd explains how you can demonstrate the quality of your service and explain to your clients why they can trust you with their claim.
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