Pricing in the R&D tax market—how do I strategise?
The dynamics of the R&D tax consultancy market have shifted considerably over the past 5 years or so. A rapid increase in the number of competitors, along with an associated increase in the number of claimants as marketing spend and general awareness increases, has led to a general squeeze on pricing. This is especially so at the higher end of the market where the large specialist consultants have been competing head to head for some time.
State of the Market
Browsing through the latest R&D tax stats from HMRC (https://bit.ly/3pxpFRH), it’s clear that the biggest area of growth in the scheme is with the smallest of claims. 72% of all claims (by volume, rather than value) have an eligible spend of under £50k. In addition to this, the growth in new applicants continues, and again these figures are dominated by SME’s with smaller claims.
The R&D tax market has traditionally been served by a combination of larger accounting firms and large R&D tax specialist consultancy firms. As recently as five years ago, contingent fees from these providers were running at up to 35% of the realised tax benefit. A huge price to pay when putting a claim together for what is, afterall, a benefit to which the company is entitled.
Some would argue, of course, that many large claims can be complex and it is often difficult to understand the legislation and interpret it in a meaningful way, especially in complex or perhaps edge cases.
However, the dynamics mentioned above have led to some drastic changes in pricing and even with the larger, more complex claims, we’re now seeing contingent pricing falling more into a range around 15-20%. That doesn’t stop some firms from still positioning at 25%+, but in our experience that’s becoming rare.
What’s interesting, and in fact was a huge driver in us developing the WhisperClaims app, is that this traditional method of pricing simply doesn’t fit at the bottom end of the market, which as pointed out above happens to be the largest segment, and probably needing the most help.
Most of the larger specialist consultancies struggle to service those smaller claims, not least because a contingent model, and an expensive labour force, simply doesn’t sit well with a squeezed fee.
The nett effect? Whilst the number of SME claims was growing, the available services to help those SME’s put their claims together were actually pretty thin on the ground. It simply wasn’t seen as an attractive segment to be in.
What’s the current state of play?
We’re seeing two things happening in the R&D tax marketplace just now, largely fuelled by adopting technology in the claims preparation process:
- More and more accountants are able to support their clients with an R&D service, giving them:
- More control over the client relationship and the CT submission process
- The ability to add new services, and revenues, to their portfolio
- Confidence that they can understand, and work within, the legislation
- The ability to service smaller claims than the traditional competitors in the market
- Pricing is shifting more to either a “time and materials” basis, similar to other accounting services, or a fixed fee basis. This of course is fuelling further downward pressure on contingent fee rates across the market.
Current Pricing Models
As pointed out above, increasing numbers of claims are being submitted with less than £50k of eligible spend, and in fact there were more than 10,000 claims submitted with less than £5k of spend in the last reported period.
So, how can you price—and perhaps more importantly deliver—an effective service to SME’s with claims of these sizes?
We’re seeing a number of models emerge:
- Fixed Fees
- Generally around £2,500 ex VAT.
Clearly, this won’t fit particularly well if the claim is much less than around £30k (at that level, you will be taking around 30% of the tax benefit from the client)
- Generally around £2,500 ex VAT.
- Fixed Fees with some flexibility
- To overcome the drawbacks of a flat fixed fee, we are seeing some providers adopt an approach that positions a fixed fee upfront (say the £2,500 price point above) and if the claim turns out to be so small that the fee doesn’t fit, simply go back with a “time and materials” quote
- Technology allows this – our pricing model, for example, is capped and allows very small claims to be priced accordingly – our smallest claim to date had just under £1k of eligible spend!
- Capped fees
- Another variation is to adopt an “up to” pricing model. For example, 5% of identified eligible spend, up to a maximum of £2,500.
- We’ve also seen providers adopt a minimum service fee under this model too – so, £250 minimum for example.
- Combined fixed/contingent models
- Finally, we’ve seen a number of providers adopt a model that allows them to cover some of their fixed costs with an up-front fee (say £600) and then a contingent fee on top (say 5% of identified eligible spend).
Which model should I choose?
If you’re entering this market for the first time, there are a couple of things to remember:
- Be competitive – so adopt a model that will make you stand out from the inevitable noise your clients will have already been subjected to (it’s a crowded market – so they’re likely to have heard from your competitors)
- Be sensible – don’t undercut yourself! We’ve come across firms who are giving R&D tax support away for “free”, or at least bundled with other services – this is a complex area of legislation and you are adding real value to your clients – don’t give it away!
I’d say the model we see adopted the most, and is growing the most, is probably (2) above – pitch a fixed fee, but be flexible – if the claim turns out to be really small, don’t walk away – adopting technology will allow you to service these claims no matter how small they are. Your clients will thank you for it!
Brush up on the fundamentals of the R&D tax relief scheme
Streamline your claims processes and get straight-forward advice on the R&D tax relief scheme.
If you’re an accountancy firm looking to launch an in-house service, get to grips with the fundamentals of the R&D tax scheme and explore strategies to optimise your claims preparation processes, this is the guide for you!
- 6 chapters and 30 pages loaded with useful guidance and tips on:
- A brief history of how the R&D market has changed
- What counts as R&D?
- 8 steps to preparing robust HMRC-compliant claims
- Avoiding common mistakes and pitfalls
- Smart move to make when setting up your service
- Launching your in-house R&D tax service
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