For many years, one of the most tired clichés used by some R&D Tax Credit advisory companies has been that “95% of companies eligible for R&D Tax Credits still aren’t claiming”.
This is usually accompanied by statements along the lines of R&D Tax Credits being “not just for men in white coats” and that “you’d be amazed at what you could claim for!”
Even today, some established R&D advisors can be found online quoting the number of supposedly eligible companies not claiming R&D Tax Credits as being high as 95% or even more incredibly, 99%.
In a widely cited survey produced by one well-known R&D advisory firm, an unlikely 57% of the UK’s 3.5 million SMEs apparently qualify for R&D Tax Credits. Yet, “only 1% have ever claimed, which means approximately 1.96 million SMEs are owed money back” with the Treasury “sitting on an SME war chest worth £84.2 billion” of unclaimed R&D Tax Credits.
Whilst there may well have been a high level of non-claiming companies during the early days of the R&D Tax Credit scheme, the number of R&D claims submitted today continues to soar year-on-year. According to figures from Forrest Brown, the total annual cost to the Treasury of both R&D schemes will reach £6.3 billion in 2018-19 with a record 68,295 companies submitting claims. This compares with fewer than 20,000 claimants as recently as 2014-15.
So, is the Treasury sitting on a multi-billion pound “war chest” of unclaimed R&D cash, which they are desperate to give to any local restaurant cooking up a new flavoured pizza?
Not exactly. Far from 95% of eligible companies not claiming, we may be much closer to a situation where the vast majority of companies that qualify are already making claims.
The annual Business Enterprise Research and Development (BERD) survey is a highly relevant metric that compares the value of expenditure being claimed within both R&D schemes against the amount reported by an annual sample survey of 5,400 UK businesses.
The BERD survey estimated that £25 billion of R&D expenditure was incurred in the UK in 2018. This is compared with HMRC’s estimate of £34.5 billion in R&D expenditure that was submitted for R&D Tax Credit claims over the same period.
Something is going wrong, and not only in terms of the number of claims submitted but also in the value of the R&D being put forward by companies as qualifying expenditure.
It is far from a coincidence that the rapid growth in R&D claims in recent years coincided with an increase in the number of R&D advisory firms and accountants promoting R&D Tax Credits. Many of these can be highly bullish regarding the type of projects that can be claimed and the associated costs.
One wheeze used by some R&D advisors to artificially inflate the value of R&D claims is to start with a blanket proportion of the payroll costs, which they consider to be within a range that would be “acceptable” to HMRC, and then try and construct some R&D projects that add up to the made-up total cost.
Understandably, claimants can become uneasy at this idea, so the advisor will attempt to settle nerves by saying that HMRC doesn’t mind as the Treasury has instructed them to get as much cash into innovative businesses as possible due to COVID-19 – after all, isn’t the Treasury sitting on an £84 billion stash of spare R&D cash “owed” to SMEs?
On the contrary, I would argue it is debatable whether all the companies currently claiming R&D Tax Credits are doing actual qualifying R&D, let alone 95% not claiming at all.
With one large R&D Tax Credit advisory firm encouraging local restaurants to submit claims comprising projects around “anything they can’t Google”, the situation has got out of hand.
There is also a sense that some R&D Tax Credit claims are significantly higher in value than they should be and much has been written about “no-win-no-fee” models that could encourage less scrupulous advisors to exaggerate the actual R&D costs.
Yet, many R&D advisors seem unaware that HMRC is believed to have had concerns regarding the number of R&D claims they were receiving at least 3-4 years ago. Up to this point, HMRC had still been undertaking outreach work to raise awareness of the scheme amongst companies undertaking R&D.
Gradually though, HRMC could not fail to notice the enormous growth in the number of R&D claim advisors and concluded that outreach was no longer necessary. Indeed, it would have been relatively clear by this time that there probably weren’t many companies left that were undertaking R&D and which hadn’t already been contacted by an R&D advisor, often on multiple occasions.
This is leading to a noticeable increase in HMRC scrutiny in recent months. With HMRC hiring an additional 100 tax inspectors to work on R&D Tax Credits, along with a campaign of “nudge letters” and a more robust risk screening process when reviewing claims, companies can now expect a much higher level of claim inspection.
Oblivious to this, new R&D advisory firms are springing up every week and some companies report being hounded on a daily basis by aggressive telemarketers. This leads to a strong suspicion that it’s now less about finding new companies that legitimately aren’t claiming R&D and more about finding companies that are willing to have a claim constructed for them by a wily advisor – whether it meets HMRC’s eligibility requirements or not.
It is abundantly clear that statements such as “95% of eligible companies aren’t claiming R&D Tax Credits” are absurd.
Suppose the nearly 70,000 companies claiming per year represent only 5% of eligible companies. This would make a theoretical total of 1.4 million claimant companies – virtually the same amount as the total number of UK businesses with one or more employees.
The precise figures can be debated; however, R&D advisors who still peddle the myth that 95% of eligible companies aren’t claiming R&D Tax Credits are wrong.
As ever, my recommendation to anyone already claiming or considering claiming R&D Tax Credit is to work with a reputable specialist advisor and avoid any firm that makes bogus statements such as 95% of eligible companies are still not claiming.
Rufus Meakin
MSC R&D Sales Associate and specialist in large R&D Tax Credit claims; Industry-leading seller of R&D Tax Credits since 2005.
