Numbers are everything in our industry. They’re absolute. They’re the truth. They don’t lie. Which is possibly why statistics are frequently used by R&D tax credit advisers in marketing materials. They give an understandable measure of success. Something businesses and finance teams can grasp quickly.
But, as Mark Twain said, “There are three kinds of lies: lies, damned lies, and statistics.” When used out of context (or even in), statistics have a persuasive power that can bolster weak arguments. Sadly, it seems there are many of these being made on the topic of R&D tax credits at the moment.
Just recently, we’ve seen an explosion in their use. The most common ones that keep popping up are variations on themes such as “we have a 100% success rate”, “our HMRC enquiry rate is the lowest in the business at 0.2%”, “our average claim size is £100,000” or “our fees are the lowest you’ll find at 5%”.
In isolation, these statements sound great. Who wouldn’t want lots of free money, without an HMRC enquiry and all for a bargain fee? However, if you scratch the surface of these claims, the truth is a little more complex – it always is. Accountants need to be wise to this, because their clients are often wowed by the statistics, drawn into an R&D tax credit claim that is storing up trouble, and the accountant has to pick up the pieces.
What’s in a number?
Let’s look in turn at each statistic. Firstly, the 100% success rate. The process for gaining an R&D tax credit is self-assessment. By default, you’re going to have a 100% success rate if you’re checking your own homework the vast majority of the time. HMRC only have the resources to challenge a small proportion of the R&D claims that get filed. In addition, there are ways of trying to maintain this questionable record, such as making claims that are unlikely to face an enquiry because they’re low value, rather than a realistic claim for what a business might be due. Alternatively, an adviser might have a 100% success rate because when HMRC comes knocking, they walk away, leaving the customer to deal with the enquiry.
In fact, touting a 100% success rate is a sign of poor practice. Why? Because R&D tax advisers need to advocate for clients and their rightful claims, which can sometimes lead to scrutiny from HMRC. Tax advisers walk a very narrow but incredibly well defined line which requires them to get it right and this prevents a reputable adviser from either over-cooking a claim (tax evasion) or under-cooking it (bad advice). An adviser that doesn’t do this is doing a disservice to its customers by prioritising their precious statistic over maximising their client’s claim.
Next in the spotlight is an enquiry rate that’s far below the so-called industry average. As mentioned above, we’ve seen the figure of 0.2% compared to a national average of 14% in marketing materials from some advisers. To explain, an enquiry is when HMRC decides – for any number of reasons – to investigate the claim for a credit. It sends a letter to the claimant and a process of investigation begins, which can lead to the credit being reduced, or even being paid back in full. It can also affect the whole tax position of a company and HMRC have the power to charge penalties for errors. A low enquiry rate should therefore be something to be applauded, right? It’s a sign of an adviser being prudent.
Perhaps. However, this stat should ring alarm bells. Because HMRC doesn’t publish national averages for enquiries. At best, that figure of 14% is a rough guesstimate. At worst, it’s made up. Moreover, if we consider how many claims are made every year – over 48,000 – an enquiry rate of 14% equates to 6,700 enquiry cases. HMRC has around 20 staff to oversee this supposed caseload. That means each employee would dealing with a new enquiry for nearly every day of the year. Given that enquiries can take months or even years to resolve, that workload is unrealistic. Nevertheless, let’s be careful not to use one statistic to disprove another.
The final number we often see varies from adviser to adviser, and relates to the average value of a claim made. In this case, HMRC does publish the national average – it’s about £54,000 for an SME. An adviser might look at this figure and claim, “our average figure is much higher”, suggesting that somehow its methodology yields more cash.
Sounds good, doesn’t it? Not really. In reality is means one of two things. Either the adviser turns down businesses who have smaller claims to make because it doesn’t want its average to be pulled down, or it’s making aggressive claims that are beyond what the credit should be, thus increasing the risk of an enquiry. In both cases, the client loses.
The overall point is this: each time a statistic is used, all it does is uncover something about the business model of the adviser. A business wedded to these for their marketing risks becoming too conservative, too aggressive, too selective or failing to defend their own work when clients facing an enquiry. In the end, the adviser is driven by the need to maintain the statistic, and the façade of success, rather than the needs of its clients.
At times, the R&D tax consultancy market can feel a bit like the Wild West with guns for hire who are out for a fast buck. But change is coming. HMRC is taking note of the way some advisers operate and is cracking down. We know that HMRC has dedicated more resource to managing R&D claim enquiries, and the government is consulting on how to improve standards across the tax advice market. We also know that HMRC’s agent strategy team target false advertising and can close down websites making false claims if they spot them.
Sadly, those behind the closed websites are likely to pop up somewhere else and continue plying their trade. It can sometimes be difficult to keep track of just how many firms are out there offering R&D tax credit advice. Worryingly, many seem to be offering something that is too good to be true.
To support HMRC in its task of bringing the sector under control, the professional bodies are also doing their bit. The Chartered Institute of Taxation, The Institute of Chartered Accountants in England and Wales, and The Institute of Chartered Accountants of Scotland, among others, all have the power to bring sanctions against members who behave badly or market themselves misleadingly.
However, this only goes so far in addressing the problem because tax advisers are not mandated to be members of these organisations. This has prompted a wider government consultation to help address the challenge. In my view, if we’re going to tackle the issue, it comes down to businesses and their accountants understanding what to look for in a good adviser. This includes membership of an professional body. It also means getting client testimonials and seeing how others have been treated. It might sound a little glib, but you wouldn’t choose a plumber based on some statistics. You’d want to see their qualifications, evidence of their work and probably get a trusted recommendation. It’s the same for R&D tax advisers.
Specifically for accountants, it’s about being able to have a positive conversation with clients about which adviser they’re using. Probe how the value of the claim was calculated and ask which firm undertook the work. Perhaps consider pointing out the risks of a poor claim, which might not have been made clear to the client.
Ultimately, the best R&D tax credit advisers don’t trade on statistics that look too good to be true. They trade on treating every customer individually, with the due care and attention they deserve. My one parting thought is that despite numbers being the bedrock of all we do, they don’t always stack up when used in this way. Make sure you look beyond the statistic.