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Writer's pictureAndrew Blyth

Three R&D providers gone BUST so far this year

By Andrew Blyth ATT, Diagnostax


A handful of well-known R&D providers have gone into liquidation this year. And there might be MORE to follow before the year’s out.


For years there’s been a bubble growing in the R&D claims space. Many honest businesses have been taken in by unscrupulous entrepreneurs and salespeople with little or no experience in tax, accounting, or finance experience.


The claims put together by those inexperienced claims companies are in many cases substandard and are often flagged up as erroneous or even FRAUDULENT when checked by HMRC. 

 

More and more compliance checks are being opened in a continuing trend since late 2022 – with many legitimate R&D claims being scrutinised, sometimes from companies who’ve been claiming successfully for years. 


It's starting to feel like the bubble has burst now though, as those with the highest numbers of dishonest R&D claims submitted are facing unmanageable workloads in dealing with the high volume of HMRC enquiries for clients.


The obvious knock-on effect of this is that claims specialists are becoming overwhelmed with the aftercare work for clients – if they offer the enquiry support at all. One can only imagine the resulting squeeze on revenues and margins coming shortly thereafter. 

 

R&D claims work for clients has become increasingly challenging in the last couple of years. This is partly down to a change in how HMRC are administering claims at HQ, as well as the announcements hitting the Chancellor’s statements in Budgets going back to early last year.


Not only has the tax man increased the number of its caseworkers significantly, but also the percentage of claims submitted to HMRC have risen from less than 5% to well over 20%. Whilst that creates more of a barrier and deterrent for those making fraudulent claims, it makes you wonder how sustainable it is for HMRC to be managing that number of R&D enquiries at one time.


This change in compliance approach was shortly followed an announcement in March of last year of a reduction in tax relief for SMEs for qualifying expenditure made after 1st April 2023. For loss-making coming this was almost a 50% drop in the tax credit. With not much better for profitable companies.


For good measure, they’ve introduced a new application document called the ‘additional information form’, which came into effect on 8th August 2023. Clever move, as they now get full visibility of all advisers touching an R&D claim – including accountants filing amended CT returns- along with all the project narrative in a nice, standardised format. 

 

It’s easy to appreciate how, when you look at the bigger picture, that it’s the small guys – SMEs carrying out those lower-level claims for R&D tax relief with genuine grounds for a claim - are going to end up as collateral damage.


Whilst providers who’ve been on the receiving end of increased volumes of enquiries for the R&D clients have seen a slowdown in productivity, it’s those providers with the highest volumes of enquiries, who will be hit hardest. Yet all they have to do is shut up shop, and clients are left out in the cold on their own.


In this article we’ll take a look at what’s behind all these changes, what’s caused the domino effect of R&D suppliers going bust, and where things need to move in the future. 

 

New submission form 

 

Since the introduction of the ‘additional information form’ (AIF) in August of last year, only now are we beginning to fully appreciate its true impact on the SME R&D space. The resulting ripple effect is starting to cause waves that are washing out entire advisory businesses.


The form requires advisers to include details for R&D projects included in their claim. This must match up with the guidelines originally set out by BEIS (now DSIT). It's a clever move from HMRC because it standardises the layout of information each time they receive a submission, which is a far cry from the various types of report they would likely have received before the introduction of the form (if they received one at all).


The AIF requests information on who prepared the technical narrative of the report (the R&D agent), and the person filing the Corp Tax return (the CT agent). This has ramifications for PI insurance purposes and has been fuelling talking points amongst advisers.


Moreover, the restriction of subcontracted expenditure overseas for periods starting after 1st April 2024, as well as the reduction in R&D tax relief aimed at SMEs for expenditure made after 1st April 2023, are making quite the splash too; the earning and profit potential of accountants and tax advisers alike are being hit.


If you then combine the already choppy waters with the rising tide of HMRC enquiries, on account of their volume approach to R&D claim non-compliance, the fair sailing conditions for advisers of yesteryear, are something of a distant memory.


Thankfully, after all the changes in recent updates from the Chancellor, Rachel Reeves announced that there would be no adjustments to R&D tax relief this time (other than a minor change in Northern Ireland).

 

Curtailing non-compliance 

 

It goes without saying that the government needed to take action; non-compliance had grown to all-time highs.


How oh-so-right they were to implement them. The recently published annual R&D tax relief statistics show a reduction in the SME scheme claim numbers by 23% to 55,325, for tax year 2022 to 2023. Quite the fall. The resulting amount in relief claims also dropped by 3% for small- to medium-sized enterprises.


It was difficult to foresee how these changes would play out over the medium term, however with the benefit of hindsight, it’s easy to comprehend how all those strategic changes to R&D claim administration by HMRC, and in such quick succession, can have such a significant impact on clients. 

 

“...The large fall in the number of R&D claims for the tax year ending March 2023, in particular for the SME scheme, follows the implementation of the additional information form (AIF). This form requires companies to provide additional information to support an R&D claim and was made mandatory for all R&D claimants for claims submitted to HMRC from 8th August 2023...” 

 

Hence not only did the AIF deter SME companies from making a claim in the first place, but those that did were facing a reduction on their enhanced expenditure and tax credit, for qualifying expenditure made after 1st April 2023. I imagine that too many clients & accountants producing their own technical R&D reports were simply unable to, or too risk adverse to continue submitting narratives.


Moreover, according to official figures released by HMRC in early September of 2023, in that first month after the introduction of the Additional Information Form on 8th August, that almost half of all claims submitted were rejected. Why? Because the claim didn’t include the AIF submission prior. 

 

Concerns about PI insurance 

 

Those accountants who carry out in-house claims, but are neither qualified in tax nor experienced enough in R&D tax relief, we’re being told, are growing concerned about the repercussions of producing R&D reports & claim calculations for their clients.


Why? For fear of having to report this to their professional indemnity insurers, and their monthly premiums increasing a good step or two.


It's an uncertain time in this regard, but you have to say it’s hats off to HMRC for their genius in designing the AIF; it’s really going to clean up the industry, and deal with the abundance of fraudulent claims being made.


The reality for accountants is that, even if they’re not producing technical narratives or financial calculations for an R&D report, that as the Corporation Tax agent, they will be named on the additional information form. There’s no getting around that, and they’ll go into the box called ‘any other agents’ involved in the claim. 

 

Some peculiar sub-cultures 

 

Around ten years ago, I visited an accountant in the West Midlands. Towards the end of the meeting, he told me he didn’t want to affiliate with an external R&D partner because he felt he could easily do the claim himself. Easily.


When I asked him about how he handled the report, to my surprise he quite plainly replied, ‘...why would I need a report? I just put together the numbers and submit those as an amended return...’.


Not the answer I was expecting, but I went away thinking that this somehow seemed wrong. And that, sooner or later, accountants like that are going to get pulled up on that. But as it was a fairly accepted client service among smaller accountants to do that, some of them just got on with it head down.


Clearly that’s a sub-culture in the R&D community, which was deeply rooted, but that will now be stopped dead in its tracks. How can you say whether a client qualifies to the DSIT guidelines or not, if you've not even cross-checked the client’s R&D project work against the qualifying criteria? Assessing costs is one thing, but validating the project work is a whole other matter. Without a doubt that takes skill & experience – even for a Chartered Tax Adviser.

 

Another common, yet rogue occurrence within R&D, is where clients feel confident enough to produce the claim themselves. Either that, or they’re using one of the self-serve software solutions.


A friend of mine runs a software business. I knew he’d been claiming for years, but only recently found out that he’d done his own claim report, with the accountant doing the expenditure and relief calculations. How did I find out? He sent me his HMRC compliance check letter.


Once I’d explained to him, that he’d need to respond to all the points raised in detail, he just flatly said he’d misunderstood what an R&D claim was; his whole focus had been on the commercial justification for his project work, rather than the technological advancement – as a lot of businesses misconstrue.


But when he realised that he should’ve focussed on the advancement of the underlying software development, he knew immediately that there wasn’t one. An honest mistake, but one nonetheless that his accountant submitting the calculations and report didn’t advise him on that the time. 


And this is all coming at a time when cashflow is tighter than it should be, meaning he’s going to have to go down the time-to-pay route, to ensure he doesn’t face financial hardship. 

 

 

R&D enquiries are on the increase 

 

One of the tangible differences in R&D advisory work of late has been the change in HMRC’s compliance checking approach.


An A-team have been drafted over from the Individual and Small Business Compliance unit (ISBC) to provide the extra manpower required, for its so-called volume compliance approach to R&D claims. The numbers quoted for the size of this team we’ve heard are in the hundreds, so it’s a dedicated and coordinated approach to tackling abusive claims.


And the percentages of clients now having enquiries opened have gone up too; we’ve heard it’s now well over 20%, up from less than 5% previously. And those numbers can be higher based upon industry. With food, software and education being heavily targeted. 

It's advisable to err on the side of caution when dealing with clients in those example industries, as even honest claims are being caught in the crossfire. Clients need to be made aware of the added health warnings in those sectors; we need to be advising those clients to expect the enquiry.


Even still, if they are keen to proceed anyway, they could become collateral damage to the complex enquiry approach, more suited to the large company, that is often incorrectly being applied by junior caseworkers at HMRC.


The reason all of this is needed is down to the R&D claim bubble, which has blown up in the last five years or so. That is, fraudulent claims being submitted that have no grounds for R&D tax relief, quiet often by unscrupulous R&D ‘advisers’, out for the quick buck. 

 

Last year there was unrest among members of both the CIOT and ICAEW that HMRC’s heavy-handed approach was going too far, and there were open letters published following roundtable discussions.


On the one hand, HMRC conceded that its junior officers needed more training around R&D tax relief and the guidelines. On the other, the CIOT admitted that some of its members needed refreshing on submission standards.


We understand that after the concessions, promises were made by both parties. We’re not seeing that wash through quite yet, but surely over time these talks will pay off. And we’ll hopefully find a common ground somewhere in the middle.


The next round table discussion is set for November, and no doubt there will be more developments and talking points to consider. 

 

 

R&D providers who’ve stopped trading 

  

It's no wonder then, and a sign of the times, that a squeeze on R&D advisers in practice is inevitable, due to all the recent changes. It was inevitable, with every man and their dog having a go at submitting claims at some point.


But as with anything that seems too good to be true, it probably is. For those operating in the rougher edges of the industry, there’s a sense of inevitability in the air.


There will be casualties no doubt, and actually there have been some already. As HMRC go on a full-frontal attack to counteract the bubble that has been growing in R&D in recent years, those numbers will surely rise.


And we’ve got to say it’s about time. But it won’t go without some collateral damage – reputable players, who won’t be able to adapt well enough to the plethora of changes that have come about since late ‘22. 

 

As reported by the BBC, Green Jellyfish recently hit the news spectacularly when their offices were raided by HMRC officers. What followed were a number of arrests all in relation to fraudulent R&D claims.


I recommend putting time aside to read this excellently laid out article from Dan Neidle of Tax Policy Associates, which you may have already seen. But if you haven’t, it’s worth the half hour invested.


In the hard-hitting report, Dan discusses how they are allegedly responsible for over £100m worth of fraudulent claims. They come from first-hand accounts of current and former employees of the company.


Among those accounts, Mr Neidle says he received copies of training documents, provided by Green Jellyfish to its technical report writing team, which were also shared with potential clients.


Highlighted are several screenshots, starting off with a one titled ‘ultimate goals in the care sector’. Here they detail over a dozen different examples of where R&D could exist in a care company. One of those stands out where it describes the ‘...management of a specialised outdoor garden design to mitigate common dementia symptoms (ultimate goal)...’.


Now, with R&D being focused upon advancements in science and technology, it seems obvious that taking an R&D claim forward with a client on this basis – as a company operating a care home business, and producing a special garden design - would not be valid, and would clearly attract an enquiry and closure notice.


The examples go on, but you get the gist of why HMRC have stepped in and made arrests. 

 

Another casualty you may have heard about in Q1 of this year: RDI Solutions. Established in 2019, their online presence boasted of working with some of the UK's best-known brands. More worryingly, they claimed a 100% success rate in R&D tax reliefs for their 3,000-odd clients, built up in just less than five years.


However, by March of this year, many of their clients had been left out in the cold as RDI had to call in Absolute Recovery Limited.


The latest from their website states:


“... The company is currently seeking advice from an Insolvency Practitioners to assess the company’s financial position and the best course of action moving forward for the business while it attempts to restructure. There is currently no access to the company emails, for any enquiries, please contact Michael at Absolute Recovery Limited and he will assist with your query. You can reach Michael on 01302 572 701 extension 300 or at m.hollins@absrecovery.co.uk. If your query can wait, Absolute Recovery Limited will be in touch in the next 30 days...” 


Looks like it’s curtains for them, but for the rest of us it’s... well, good riddance.  

 

The final one we’re looking at, one that came as quite a surprise, was Cost Care R&D. That’s the same one that’s been in business for over twenty years. This is more recent and there’s not much chatter about it online... yet.


We only found out about this one in October by a new client. They were in the final stages of preparing their R&D report for the AIF, which had taken them months to put together. 

By August, Cost Care had suddenly stopped replying to their calls and emails. Literally radio silence. They were left with no other option than to start again with a fresh claim with us, as they didn’t have any of the call notes, nor any of the report drafts.


I don’t know what the real story is here. I’m sure that will come out in the wash. But what I can see from Cost Care’s online presence, is that they were trying to hire B2B salespeople and telesales operatives. Does that mean they were adopting an aggressive sales strategy to winning R&D clients? Possibly. But who knows.


In one advert this year, only a few months before the liquidators came in, they had even posted on the Gov.UK website for finding work. Somewhat with a sense of irony, you would feel. 

 

Picking up the pieces 

 

Out of all the shock & awe from HMRC’s increased compliance, and the resulting knock-on effect in the industry taking out R&D advisers, the thing that is of most concern is the clients they engaged with.


From just those few examples of advisory businesses alone going bust, thousands of clients will be left carrying the can. Having to take time out of their day-to-day operations, to prepare onerous responses to the tax man, in order to justify their original claims. Some of which were not credible in the first place (often unbeknownst to them).


Without an R&D specialist to support them through the correspondence process, how is a layperson supposed to be able to translate their project work into the sentiment of the government guidelines, written by the Department for Science, Innovation and Technology? 

The time involved in defending their claim in a letter is one thing, but what about if HMRC issue a decision against the taxpayer? The company will be left facing the prospect of repaying the tax, plus interest. Then there’s also the possibility of penalties.


Somehow you wonder whether the clients are the fall guy here, and the charlatans filing those wrongful claims have gotten away with it. 

 

What has to change 

 

Is it that growing R&D specialists firms feel the need to employ salespeople, which is where a lot of the problems begin?


If you think about it, a salesperson is driven by generating leads and ultimately wants to earn commissions. By hook or by crook, they need to find new business and will go to any means possible to achieve their goal.


So, if your average claim fee were say, £5,000, and you’re able to pay 10% away to a salesperson, then when you start to run the numbers, it’s easy to see how the bubble can start to blow up in the first place.


I guess that isn’t the main problem because any 'no obligation phone calls’ arranged with their R&D specialist, could result in looser compliance for the non-tax, non-accounting qualified adviser. Especially if it’s a business owner new to R&D claims.


It could be all-too-tempting to give false hope to the client that they have the basis for the R&D claim, take them on and put pressure on the technical team to ‘find’ qualifying activity. 

I don’t know if that’s the case, I’m merely speculating. But I bet it won’t be far off in some cases. 

 

In any event, the R&D space has to advance. Something is starting to give way and will. The industry correction will (hopefully), however long it takes, wash away the bad players. 

And whilst it might leave more work in producing an R&D claim for SMEs, as well as less margins for legitimate advisers, it will hopefully mean a brighter future for clients and advisers alike. 

 

 

If you’ve got a client who has an open enquiry and has been left abandoned by an R&D adviser who’s no longer trading, feel free to contact us to discuss aftercare and support. 

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