Adam Kene, MD at Kene Partners, R&D tax incentive advisors, details how complacency is jeopardising the innovation economy here
Given the business, economic and political uncertainty that has endured for the past decade, it is tough to justify any aspect of business complacency. Yet it has become very apparent that a lack of robustness, rigour and commitment within the financial services marketplace is selling clients shortly. When 70% of UK businesses making R&D Tax Credit claims are underclaiming – often year after year – the attitude and commitment of their advisors have to be questioned.
The UK Government aims to raise R&D investment in the UK from the current 1.6% of GDP to 2.4%. and HMRC allocates millions of pounds every year in R&D Tax Credits. It is frankly shocking that leading private sector organisations are failing to support their clients in gaining essential investment.
Concerns are being raised about the quality of advice and service provided from tax to audit. With the number of companies routinely underclaiming by £100,000s each year on R&D Tax Credits, tough questions need to be asked to ensure complacency is not undermining the innovation agenda, insists Adam Kene, Managing Director, Kene Partners.
Inward investment is fundamental to the innovation cycle and growing numbers of UK companies recognise the potential value of R&D Tax credits. But in far too many cases, the annual application process has become a tick box exercise, with each application simply mirroring those of previous years.
When did the R&D Tax Credit advisor last pay a face to face visit to the business? How much time has been spent discussing business change to ensure key innovations are included in the next submission? Critically, what level of Tax Credit specific expertise is being offered? While firms will often allocate senior resources to the first R&D Tax Credit application for any client, the role is typically delegated to junior resources year on year.
The result? Massive missed opportunities. Just consider how much a business changes year on year, especially those companies pushing forward with innovation. Consider also the way in which HMRC continues to reinterpret tax credit legislation with, for example, the creation of a new team including dedicated technology experts to manage the complexity of claims related to software design. Without expertise, confidence and understanding of the nuances of interpretation, too many generic advisors simply omit any potentially complex areas within a submission.
That is simply not good enough. If the process introduced in 2014 has been simply repeated in 2015, 2016, 2017 and 2018, how much additional tax credit has been missed? The answer for one firm was stark: hundreds of thousands of pounds. The annual claim of £105,000 should have been £420,000. A fact that was only discovered when the company stepped away from its Big Four auditor and decided to work with a firm dedicated to the R&D Tax Credit process. For a company with an annual turnover of £35 million, the business cost of this systematic underclaiming over many years cannot be underestimated. Or justified.
Complacency damages UK business
That company’s decision to trust the big name was not rewarded. The Big Four firm did not undertake an on-site visit for several years and, as a result, each claim overlooked significant areas of innovation and business change. Indeed an entire department had been missed out in multiple claims. Such stories are repeated up and down the UK – from Blue Chips to start-ups. Business trust and long term commitment are being rewarded with a lack of expertise and a complacent attitude that is costing UK business millions of pounds in available and required investment.
Furthermore, this complacent attitude is undermining business’ attitudes to and awareness of the value of innovation. If the trusted advisor treats the annual process of rewarding innovation as a tick box exercise, the business will likely embrace the same approach. The model could and should be very different. When the R&D Tax Credit Advisory team comes on site every year, speaks to every department to find out what has changed, even encourages an innovation day where departments interact, the process can actively influence business culture.
Add in a consistent team of tax credit experts working with a client not just once a year, but continually in contact and assessing business change in line with HMRC interpretation, and the entire process is transformed. This is not a tick box exercise. Advisors should not be constrained by templates and agendas: to truly understand a business’ innovation activity requires free-flowing conversation and cross-department discussion prompted by experts who understand R&D Tax Credit opportunities and are confident in the minutiae of HMRC expectations.
Applying for R&D Tax Credits is a complex process, so the response from most generic firms is to be risk averse, minimising claims, aiming low and opting to avoid HMRC questions where possible. A similar approach is adopted by smaller accountancy practices – those firms typically relied upon by innovative start-ups – which by default will lack dedicated Tax Credit expertise. When a firm makes no more than a handful of claims each year, without confidence or up to date knowledge, advisors will take a risk averse approach.
The result is endemic underclaiming. Any business trusting an advisor to make its R&D Tax Credit claim requires confidence in that individual, that team. Management needs to know that these individuals live and breath tax credits and discuss the latest hot topics in legislative reinterpretation.
Firms with this level of rigorous commitment will be making regular changes in approach to ensure every application is aligned to the latest HMRC thinking. Of course, no one wants to prompt reams of HMRC questions. But the approach should be risk management, not risk avoidance. Rather than opting for the simple, low-risk applications, they will take a rigorous, detailed approach, providing HMRC with as much information as possible up front, in line with known and understood nuanced requirements. In essence, they will maximise every possible opportunity for additional investment.
Trust is a fundamental component of business practice and, for the largest R&D tax consultancies, the tide has turned in recent years. From BHS to Ted Baker, the Financial Reporting Council has imposed multi-million-pound fines on these firms – as well as personal fines to individual senior managers, citing the standard of audit advice. As yet no firm has come under review for the lack of rigour or robustness of R&D Tax Claims. However, it is impossible to ignore the widespread underclaiming. The lack of senior level commitment. Even the political infighting that can result in Audit Partners actively preventing R&D Tax Credit teams getting involved with a client.
Innovation is the key to UK business success in an uncertain global marketplace. For any CFO with even the faintest inkling that the R&D Tax Claim is under par, it is time to ask some tough questions.