Recently R&D Tax Credit scandals have been in the news. But what are the facts? What's sensationalist fiction? To get answers, we have to start from the beginning.
Background
Applying for R&D tax credits is complicated. Some would say intentionally so – a tax break by the rich, for the rich.
Faced with this complexity, companies turned to specialist R&D tax advisors.
In 2001, I co-founded a tech company and served as COO and CTO. For this company I filed nearly 20 R&D Tax Credit claims and got back over £1.5 million.
Twenty years ago there were maybe 4 or 5 specialist tax advisors; now there are hundreds.
The success of these advisors has been phenomenal. Today, more than 90% of all R&D tax credit claims use them. And, importantly, of the claims that do NOT use advisors, HMRC rejects 78% for being non-compliant.
While there are many competent advisors, seeking to submit genuine and well-argued R&D tax credit claims, there are a few unusual things about how the Specialist R&D Tax Advisor market works:
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These advisors are paid a percentage of the value of your claim rather than an hourly rate. Thus, advisors have an incentive to ensure claims are as broad as possible.
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The work required to file a claim does not go up in line with claim value. Indeed, once a claim reaches a certain threshold, no additional work is required at all.
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Advisors are paid when the tax credit claim is filed; however, as with most tax filings, HMRC inquiries are retrospective. The cost of answering a query is incurred after the advisor has already been paid in full.
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Until recently, HMRC queried less than 1% of claims.
The result is hardly unexpected. Unscrupulous advisors entered the market, encouraging their clients to:
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claim even when they did not qualify, and
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exaggerate their claims to bump up the tax credit benefit (and thus the agent's fees).
In parallel, there has been little incentive for any R&D tax advisors (scrupulous or not) to educate their clients:
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The appeal of R&D tax advisors is that they can navigate an otherwise opaque system. As they say, "magician don't reveal their tricks."
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R&D tax advisors are "on the clock". They get paid whether or not their client fully understands every aspect of their claim.
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To be fair, the 43 requirements, the lengthy but oddly vague definitions, and the structure of R&D tax credit claims are complex and counterintuitive.
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Things had to change.
Consequences
The government has been aware of R&D fraud for more than a decade. By 2019, R&D tax credit fraud had reached the top of the government's agenda. A crackdown ensued.
Today, HMRC is querying over 20% of claims. For some specialist advisors, over half their claims are under review. This contrasts with the recent past when less than 1% of claims were queried, and so the cost of defending claims was borne by the advisors.
In parallel, the cost of defending historic claims has been exorbitant. The result is that some advisors are shutting down, keeping their fees, and letting their prior clients fend for themselves.
An unintended consequence of this crackdown on fraud has been a stifling of innovation. A fintech provider, wooed to the UK by the Department for International Trade (DIT), left after a particularly challenging experience with HMRC, taking 100 highly skilled jobs with them.
The impact on small companies has been particularly pronounced. First, a disinterest in re-explaining the obvious to HMRC has led to small companies dropping their claims - a fact that HMRC then takes (for statistical reasons) as evidence of malpractice. Second, as the frequency and cost of enquiries has increased, smaller companies have become uneconomic for professional advisors.
The pendulum swung towards rampant fraud. Then it swung back to aggressive enforcement, but now it appears to be returning to the centre.
In August last year, HMRC published an online Additional Information form, which asks 50 questions, 6 focussing sharply on a comprehensive justification of the innovation underlying a claim.
Previously, there was no official format for what an R&D tax credit claim should look like. Different advisors did different levels of work and submitted different documents. Less than 1% of these were checked, and so there was no feedback. No one knew what HMRC would consider to be sufficient.
Although a substantial backlog of historic claims remains which may require further elaboration, claims written today (in compliance with the Additional Information form) are easier for HMRC to process and approve.
Enter Claridian.AI
Claridian was launched with the Additional Information form in mind. It fills the gap between doing a claim yourself (with a 78% chance of getting it wrong), and trying to retain a competent R&D tax advisor with a smaller claim they may view as uneconomic.
Claridian does things differently.
First, the traditional approach to claims is to say the minimum necessary to gain approval. Largely this is because human advisors are "on the clock". The get paid regardless of how well they understand the basis of your innovation.
In contrast, we use a specially-trained AI robot. Our AI robot educates and listens in equal measure. We believe it is important for business owners to fully understand and internalise HMRC's requirements and thus are comfortable their claim is compliant.
Not only does this result in better claims but often it triggers a recognition that other projects done by the company were also innovative - leading to a more comprehensive and cohesive claim.
Second, our AI robot is patient and insightful and has a perfect memory. When I have sat down with R&D tax advisors in the past, our time together was limited. I needed to convey as much information as possible in the time allotted.
Reflecting on the challenges a project faced often is not something at the front of your mind. Sometimes you need to "sleep on it" and come back. Our AI robot works at your pace at the times you are ready. It is sharply focused on meeting the requirements, but pursues this objective with a friendly, encouraging tone, explaining the concepts as you go along.
Third, Claridian does not work on a commission-basis. Accessing our AI robot is on a fixed price. If you don't meet the requirements, that will become obvious to you. There is no incentive to justify the effort already invested by filing something on the chance it will pass.
Fourth, if HMRC does raise a query, our AI has a perfect memory of all previous conversations. Placing it in an excellent position to understand the nuances of HMRC's queries (which it can explain to you) and to provide a first-draft response.
Fifth, significantly, this process aids other parts of your business - for example, helping you find non-technical words to explain your innovations to the board, to funders, and to clients.
Start a conversation with our AI robot today. See whether your projects appear to meet HMRC's requirements. If they do, our AI will write the first-draft of a comprehensive, compelling R&D tax relief claim. But if they do not, you are under no pressure to file a claim that may not pass mustard.
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https://www.claridian.co.uk/r-and-d-tax-credit-assessment
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