In a recent LinkedIn poll, I asked R&D Tax Credit advisors and R&D claimants for their opinion on contract “lock-ins”.
Contract lock-ins are where an R&D advisor has contracted with a client to prepare R&D claims for future years beyond the most recent accounting period.
This practice has been controversial over the years with some contracts committing an R&D claimant to use the same advisor for the next 5 or even 7 claiming years.
This is an extract from the T&Cs of one of the biggest R&D advisors dated 2016:
“The Contract shall come into existence on the date (Commencement Date) when the Client signs the Client Instruction Form (as stated overleaf) and, subject to clause 11, shall continue for an initial period of 5 years (Initial Term) and subsequently thereafter until terminated in accordance with clause 11”
On the face of it, this clause does seem rather punitive, particularly as there is no way for the claimant to terminate for at least 5 years, regardless of the advisor’s performance.
Of course, R&D Tax Credits are not the only sector where clients are asked to sign a long-term agreement however the results of my poll suggest that a sizable chunk of the R&D market (37%) believes that lock-ins are “totally unacceptable” with another 45% saying they are okay “under some circumstances”. Only 18% believe they are perfectly acceptable.
For what it’s worth, my own opinion is that it is fine in certain circumstances. And this is why.
In my early days of selling R&D Tax Credits (between 2005 and 2009) R&D was still considered a relatively niche area of tax where deep specialist expertise was required. From around 2010 onwards, it gradually began to occur to general practice accountancy firms that this was a service that they could provide themselves, albeit with a significantly lower service level which was often no more than a basic checking service.
As well as being fiercely protective of their client relationships, accountants had spotted the very large contingency fees charged to their clients by some R&D advisors, often 25% or even 30% of the claim value, and they didn’t see why they should miss out.
From a selling perspective, this led to some very unfortunate situations where specialist R&D advisors would prepare a claim for one or two years only for their client’s accountant to turn around and say that they could provide (supposedly) the same service but at a fraction of the price.
The accountant would then typically copy everything the advisor had done on the previous claim and file it with HMRC with minor updates.
Understandably, this practice of undercutting and brazen plagiarism by accountants enraged many specialist R&D advisers, especially those that had invested heavily in the dedicated personnel, expertise and training that is required to provide a fully-fledged, professional R&D service.
I have lost count of the number of companies over the years that I was about to sign-up for R&D Tax Credits only to be scuppered at the final hurdle with the soul-destroying words: “thanks for all your valuable help and advice but my accountant has this covered”.
It was within this context that specialist R&D advisors began to add multiple years onto their contract terms. And claimants were initially more than willing to go along.
Before R&D Tax Credits became as widely known as they are today, business owners who were told they might be eligible for this tax break literally couldn’t believe that HMRC could be so generous. It was simply a case of asking the advisor “where do I sign?” Little thought was given to the fact they were committing to an additional 5 future claiming years – they were just delighted to bank the money.
As well as their non-technical accountant pitching for the work, over time the claimant would be cold-called by other R&D advisors who said they could offer a lower rate. The claimant would then retrieve the R&D Tax Credit contract they had signed a couple of years back from a dusty folder. Shocked to discover that they had inadvertently signed up to a 5-year lock-in they would work out they were paying sometimes tens of thousands of pounds more than what they now belatedly found was the actual market rate.
To be fair to the claimant, it was often a case of blatant profiteering by the advisor. Knowing that the R&D costs were likely to increase over time, often by a considerable margin, the R&D Tax Credit salesman had locked-in their client to an agreement that would see their fee for the final years of the term rise to astronomical proportions and way out of proportion to the work involved.
Heated discussions would often ensue between R&D advisors and their clients. Some advisors would take a pragmatic view and come to a compromise to retain the client. Others would immediately threaten to engage their lawyer.
In the core R&D sectors, such as medicine and computer science, claimants today tend to be very aware of the terms they are signing up to. However, lengthy contract lock-ins do still exist in some sectors. Many of the newer, aggressively-marketed R&D firms have expanded into non-traditional R&D sectors and will lock their unsuspecting clients into 5-year contracts at rates of 35%.
Such lock-ins are often justified under the guise of giving “full coverage in the event of an HMRC enquiry” for the duration of the contract as if this were some kind of added bonus.
There is a dubious practice by some less scrupulous R&D advisors whereby it won’t support an HMRC enquiry to one of its own claims if the claimant switches to another advisor.
What should a claimant do if asked to agree to a contract lock-in?
The results of my poll were interesting in terms of who voted for each option. The majority of people voting for lock-ins being “totally unacceptable” were accountants rather than specialist R&D advisors. Those that thought lock-ins were absolutely fine were mainly specialist R&D advisors. This may suggest that some accountants are still letting a specialist advisor identify the R&D claiming opportunity and do all the heavy lifting on the first or second claim before they swoop in to pick up future claims at a lower rate.
Given that an R&D advisor will lay the ground for future claims as part of the first claim, I think it is perfectly acceptable to ask for an engagement that includes future claims.
However, it is also not unreasonable for the client to expect some kind of incentive in return. This would generally take the form of a discount on the contingency fee. So for example, if an advisor quotes 10% for an agreement to cover 2 future claim periods, try asking what the rate would be for a shorter engagement.
If the advisor says that a shorter term is not possible then call their bluff. When pushed, most advisors will offer a shorter engagement due to not wanting to want to lose the business however it is only fair and reasonable that the rate for this would be slightly higher.
I would definitely not recommend that an R&D claimant sign up to anything longer that a single future claim year without carefully considering all their options.
For instance, a claimant may consider an extended contract with say 3 future claim periods to be a benefit as the planned reductions to R&D Tax Credit rates could mean that the claimant avoids a possible increase in the fee charged by the advisor (so the advisor is effectively taking on more risk).
In general, a moderate, sensible lock-in can work for both the advisor and the claimant. An engagement for the previous year plus the current year plus the following year is a standard engagement and I do not believe that this should be controversial.
Anything more than this is probably looking too far into the future for both parties.
Content by Rufus Meakin.
Find the full article here
