One of the questions that I often encounter, when I pitch our R&D Tax Credits service, is why people should file with us rather than using their own accountant. In some rare cases, it makes sense to file with your accountant, but most of the time it’s not a great idea, for a number of reasons that depend on the exact situation.
This can be a very difficult objection to overcome, because people naturally trust their accountant (and if they don’t, they should probably change right away!), so I often find myself toeing the line and trying not to dismiss the accountant’s advice, even in cases where it is completely wrong.
The fact is, R&D Tax Credits are a complex field where depth and breadth of experience makes a large difference. Unlike many other tax issues, “Science and Technology R&D Tax Credits” are not clear-cut. The problem starts with the very definition of “Science and Technology R&D”. Over the last two years, I’ve become an expert at understanding what kinds of projects HMRC considers “qualifying R&D”, what kinds are not qualifying, how to best present those projects to make it easy for HMRC to be able to decide whether they qualify, how to calculate the costs and apportion them appropriately, which costs are likely to pass and which won’t, and so on.
This kind of understanding comes at a price: filing many dozens of claims, interacting with HMRC on the phone, by email and in “aspect enquiry” meetings numerous times, reading through the HMRC documentation too many times to admit, and so on. I’ve been able to do that because GrantTree’s job is to be the expert on R&D Tax Credits, so we can afford to spend the time to really understand all the subtleties of the scheme.
Even the few accountants who have some understanding of R&D Tax Credits are unlikely have this depth and breadth of understanding, not to mention the technology know-how to write a convincing technical narrative. We work with a number of accountants, and often spend time educating them about what they need to know about R&D Tax Credits, but at the same time, there have been a number of situations where the main obstacle to taking on a new client was a misinformed accountant who passed on their misunderstanding to the client.
Let’s look at several typical situations and break down the misconceptions.
1. “My accountant hasn’t told me about tax credits”
The implication in this case is that if your accountant, whom you trust, hasn’t told you about tax credits, they must have had a good reason.
In practice, the good reason is often simply ignorance - and in most cases, justified ignorance. A large proportion of accountants (who are, in other areas, very competent) have only the most superficial understanding of R&D Tax Credits. That’s understandable, because there are many different areas of tax law that are relevant to all their clients, and R&D Tax Credits is, comparatively, a niche scheme that applies only to certain kinds of technology companies, which are usually a small portion of your average accountant’s client base.
In other cases, the reason is fear. Most accountants are naturally risk-averse, and so if they’re uncertain about wether you’ll get the tax credit (which they naturally will be, since they don’t understand technology or have much experience of filing R&D Tax Credits), they may simply opt to not discuss or even tell you about them.
If you think that your business might qualify for tax credits, and you’re not sure if your accountant knows about it, it’s best to check with a specialist firm (like us!) to find out the truth from the expert’s mouth. Most specialist firms are paid on success, so they have no incentive to tell you you qualify, unless you do. Even if you then go on to file with your accountant, at least you’ll have a specialist’s opinion.
2. “My accountant told me I couldn’t file”
HMRC’s definition of “qualifying R&D” is quite subtle and finicky. Often, the same product can be presented in multiple ways, some of which obviously qualify, while others are obviously not qualifying. Teasing out the technical details about a project to figure out if it qualifies requires a deep understanding both of technology and tax credit regulations.
As a simple example, a manufacturer who develops and sells remote-controlled toy helicopters could disqualify themselves by declaring that their projects were to develop new toys. HMRC may take the time to tease out the underlying innovation, but they often won’t, and if they push back, the discussion could easily end up disqualifying all the work, if the manufacturer doesn’t know how to handle an R&D Tax Credit HMRC meeting. Conversely, if this same manufacturer filed a claim focusing on the technologies they’ve had to develop and tune (remote control, aerodynamics, balancing, battery, integration of components), they probably will sail through without issues.
One of our clients, a Seedcamp-funded startup whose primary activity is to develop innovative, obviously qualifying software, was told that their product didn’t qualify. They haven’t changed their accountant (and shouldn’t, as this is a specialist matter that other accountants probably won’t know about either!), but we’re now getting them tax credits and they’re happy with this.
Accountants can’t and shouldn’t be expected to be experts in technology. That’s not their job. Unless they specialise in R&D Tax Credits and have a technology background relevant to your industry, you should check with a specialist before taking their word that you don’t qualify. They may be right, but given the amounts at stake, it’s certainly worth getting a second opinion.
3. “My accountant said it wasn’t worth filing”
Once aware of the scheme and knowing that a project qualifies, there still comes the tricky matter of figuring out the costs.
HMRC’s regulations, intentionally or not, leave a lot up to interpretation. Depending on how you read them, you may come up with a definition of qualifying costs that excludes almost all R&D costs, or that includes everything. The truth, as always, lies in the middle, and changes over time, too.
Moreover, the calculations largely depend on what is defined as “qualifying R&D” and what isn’t. This means that without a thorough understanding of both the technology and the scheme, it is almost impossible to figure out exactly where to draw that line.
As mentioned earlier, accountants are often risk-averse, so they will prefer to file a more cautious, conservative claim that they are confident will pass without issue. Sometimes, the cautiousness goes to extremes. One potential client which we knew qualified and knew had significant costs was told repeatedly by their accountant that only a tiny slice of their costs qualified, so that it wasn’t worth filing. As a result, they haven’t signed up with us, haven’t filed for tax credits, and have missed out on tens of thousands of pounds of tax rebates.
Again, the conclusion is clear: ask a specialist.
4. “My accountant does our R&D Tax Credits”
My reaction to this used to be “great, it’s good to see that you have an accountant who’s on the ball”, but over time I’ve changed my view of this. “Filing tax credits” is not a binary activity, where you either do it or don’t do it. You can file tax credits well or very badly, and without a thorough understanding of the scheme you’re more likely to end up towards the latter. I’ve seen quite a few cases where claims were filed by the client’s accountant and were overly conservative, missed out projects or costs, included costs that didn’t qualify, and so on.
The worst part about this is that it’s much harder to adjust the costs upwards in a re-filing than to get them right the first time. Re-filings get extra scrutiny from HMRC, so they’re more likely to get push-back, which results in phone calls or meetings with HMRC that take hours and usually result in some reduction of the claim (HMRC inspectors like to see some tangible result from going to a client site for a meeting, so you’re unlikely to get out of one with all your feathers!). So when we see a poorly filed claim, unless the amounts are very large, and therefore worth the risk, it’s usually better to just file better claims in the future and leave the older claims aside, even though tens of thousands of pounds have been omitted.
Another problem with this situation is that it often masks the fact that the accountant doesn’t “do R&D tax credits” at all - they just do the calculations (if even that), which is only one part (and the easier part, once the definition of what qualifies and what doesn’t is nailed down) and the filing, and let the client figure out what projects qualify and how to present them. If your accountant “does R&D tax credits” for you, do they spend time teasing out the technical details from your tech team, figure out which projects qualify, help you gather the financial data and finally help you decide how to calculate the claim? Do they tell you how to write the technical narrative to avoid disqualifying yourself inadvertently? Do they tell you how to position your technology developments in the right way to make the process smooth and easy? If they do, great. You have an awesome accountant. Don’t let them get away. If they don’t, that means that you’re really doing your tax credits yourself, and they’re just doing the filing - risky business, that.
Even if your accountant “does R&D tax credits” for you, it may be worth talking to a specialist, getting them to review your claims, and generally getting a second opinion as to whether you could increase the size of your filings in future years. Again, given that R&D Tax Credit specialists tend to work on success fee, they have no incentive to lie to you, and every incentive to help you get more money. And given that such consultations are usually free, why not do it?
5. “I’m with a big practice, they know what they’re doing”
Some companies we talk to are using a big practice, and so they think they’re covered in terms of tax. It’s absolutely true that Deloitte, Grant Thornton, and other similar sized accountancies will have R&D Tax Credit experts on board who know the scheme inside out and then some.
However, it’s also true that most of the staff of a large accountancy won’t know much about tax credits. Whether you get good tax credit service will depend on who you talk to. They also won’t be cheap, and probably won’t bother filing tax credits for you until the amounts get really large and worthwhile for them.
In one case we encountered, a highly technical company that was spending over a million pounds a year on qualifying R&D (and had been spending similar, increasing amounts, for over ten years), was with a large accountancy, who had not told them about tax credits. We estimated that they had lost over a million hard pounds of tax rebates by not filing - and that was only counting the accounting years which were further than 2 years back, which could no longer be filed for.
Accountants can’t be expected to know everything about everything. Most of them will have a relatively superficial understanding of R&D Tax Credits, and even those who file tax credits regularly on behalf of their client often offer an incomplete service compared to using a specialist.
Talking to an R&D Tax Credit specialist is a no-brainer. The initial consultation doesn’t cost anything, and you might find out ways to reclaim sizeable chunks of tax. That’s true whether or not you are currently filing tax credits with your accountant, and whether or not they have told you that you should or shouldn’t file.