2020 Blog Series (2) – The History of the R&D Tax Advisor Posted on: December 1, 2020
Following the previous blog, it is easy to see that there has been a significant rise in the number of claims being made in recent years. This rise has driven and shaped an entire new sub-sector within the accounting industry – namely that of the R&D Tax Advisor and the R&D Tax Boutique.
The market for R&D Tax advice has grown to be quite complicated, but it’s important to understand how we got here before we can discuss some of the deeper issues.
‘Phase 1’ (circa 2000-2009) and the rise of the ‘Big 4’ Accountancy Firms
‘Phase 1’ is how I informally refer to these early days of R&D tax. How were R&D claims handled during this time? Well…
- A small number of accountants would ‘plough on’ and try to do claims in-house,
- The vast majority of accountants would avoid R&D claims altogether, generally because they did not understand the BEIS Guidelines,
- Many accountants were not aware of R&D tax,
- Accountants often misinterpreted the BEIS Guidelines and told clients that they didn’t qualify.
The ‘Big 4’ accountancy firms were the main players to emerge during ‘Phase 1’. They had the capacity to create multi-disciplinary teams of accountants teamed with technologists, and to have these people specialise solely on the subject of R&D Tax. Middle and lower tier accountants either couldn’t afford such a specialist resource or didn’t understand R&D Tax enough to recognise the demand for this type of team (at this time).
Overall, it is fair to say ‘pure’ or ‘traditional’ accountants struggled. As non-technologists, the difficulty lay in:
- How to understand the complexity of the BEIS Guidelines,
- Understanding different fields of technology,
- How to speak to developers to even understand and help to assess their work,
- How to understand the development work against the context of the BEIS Guidelines, and then also;
- How to make and develop the supporting case – the compilation of the claim report and the technical report.
As a result, it was often the case that accountants passed the general responsibility of R&D claim preparation to their clients. While a claimant would be well positioned to understand their own business, asking them (or their developers) to become experts in R&D tax in addition to their current job, was just not realistic. In fact, it could open up a claimant to considerable tax risk.
Writing a high quality, formal and robust supporting R&D claim report is far from straight forward. Especially when the stakes are high – possibly the claimant is looking to make a large claim, or this is potentially a critical source of funding. To add context; when I have recruited highly competent seasoned technologists from industry to become R&D tax professionals, it can take up to 2 years training and full-time work on over 60 R&D claims before they are entirely proficient in the skill of writing and positioning formal R&D claim reports and their supporting technical narratives.
Making claims in the ‘early days’
To combat these risks, and ‘just to be safe’, claimants would often put in very low claims – low in terms of the ratio of staff costs to R&D costs – and so HMRC would not be particularly motivated to query the claim. This type of behaviour is still seen today. We have previously improved claims by a factor of 4 where non-R&D tax professionals have worked on the initial claims or the claim preparation had been undertaken in-house.
During this time (‘Phase 1’), most claims were processed by general Corporation Tax HMRC inspectors. Some escalations were handled by dedicated R&D tax inspectors but without any real centralised controls, standard operating procedures or unified approach to assessing the claims. The result – every inspector interpreted the rules differently! It was a crazy time, and it peaked around 2007/8 with inspectors making comments like ‘if it isn’t a new programming language, it doesn’t qualify!’. Clearly this was incorrect – the inspectors were struggling as much as the accountants, and for the same reasons – they were not technologists. The KPMG R&D tax team (my employer at that time) was involved in training HMRC’s R&D teams on how software development takes place in the real world and, importantly, how this aligns with the BEIS Guidelines. Thankfully, the penny dropped, and HMRC gained a much better understanding of how software development aligned with the guidelines.
Also, in these early days, you could compile claims that could reach back over 6 historic accounting periods. The claims were gargantuan. How to evidence these claims or even create some sort of robust methodology was, dare I say, farcical. As a result, most claims were challenged – HMRC didn’t know how to deal with these challenges, and so the enquiries were often drawn out (often over a year) but generally ended in a bit of ‘horse trading’, as long as HMRC had agreed that the R&D activities qualified in principle.
The confusion surrounding the R&D claim process meant that making claims was unattractive during this time period, even unreliable, and therefore (generally speaking) only large companies and a few patient SME’s pursued claims. As a result, only a low number of claims were made, and awareness of the scheme was very poor.
The rules changed in 2008, reducing the 6-year claim window to 2 years – a more sensible scope for assessing claims.
Towards the end of this period of time – circa 2008/9 – HMRC took bold steps to restructure and increase awareness. As part of this process, HMRC created dedicated R&D units, the RDCC (the R&D Consultative Committee), specialist teams focused on R&D tax and an effective structure for processing claims.
‘Phase 2’(circa 2009-2011)- The Rise of the Accountants
2009 was the start of a period of significant change; making the regime stronger, refining the legislation and the guidelines, relaxing and clarifying certain rules, and also introducing significant rate rises to both the SME and Large company R&D Tax regimes. These were all very welcomed steps by industry, accountants and tax professionals alike.
As the number of claims rose, so did the awareness. However, it was still the case that the vast majority of small to middle tier accountancy firms had not evolved their practices to be more aware of R&D tax, and it was still the case that some of the Big 4 did not have dedicated R&D tax teams. In fact, around 2010-2013, I can recall regularly giving presentations to lower and middle tier accountancy firms who admitted that they had thought R&D tax was an aggressive tax scheme that HMRC ‘frowned’ upon (not remotely true!).
However, a small number of middle tier accountancy firms started to break away from the norm and now wanted to join the party. This started to crystalise one of the first problems that we see today – a rise in general accountants (non-technologists) undertaking specialist R&D tax work. This introduced a range of problematic behaviours and situations.
With the increase of claimants came the problem of finding a quality advisor. The ‘Big 4’ often priced-out much of the SME market and were certainly rarely accessible to start-ups and young companies. This remains the case today – I recently saw a recruitment advert from a Big 4 accountancy firm stating that 70% of their R&D claims were for large companies.
I suspect, like me, others in the Big 4 were starting to see the potential of operating outside of the traditional and somewhat cumbersome corporate framework. Though the level of expertise in the Big 4 was unparalleled at this time, the operating framework was often too restrictive.
‘Phase 3’ (circa 2012) Onwards and Upwards
Between 2011-2013, we saw the birth of specialist R&D Tax Boutiques, with much of the leadership originating from the Big 4. LinkStep was part of this movement, but there are other reputable names in this field. I moved on from KPMG and setup LinkStep in 2012. You can learn more about LinkStep and our own multi-disciplinary team here.
The Big 4 no longer had their grip on the market. The number of high-quality R&D Tax boutiques was rising. Furthermore, some middle and lower tier accountancy firms were now also starting to invest into dedicated R&D tax teams. In this new market, the best service providers had noticed the earlier multi-disciplinary model first used by the Big 4, and took this as a starting point to develop their own delivery model.
In my next blog, as part of this series, I will start to unpack some of these points to explore and explain some of the problematic behaviours and situations seen in the industry across the different types of R&D tax advisors and potential claimants.
– Paul Mann. Managing Director @ LinkStep R&D Tax Services.