Outsource your R&D tax relief services and “offload the risk”

The outsourcing of research and development (R&D) tax relief claims will allow accounting firms to focus their efforts on other service arms and reduce workload for themselves and their clients, according to Russell McGrath, innovation funding specialist at leading outsourcing partner ABGI UK.

Explaining that ABGI can pay referral fees to accountants they work with, McGrath says “They can offload all risks and still have the same net profit at the end,”

“And because ABGI are not accountants, there is no risk that we take their clients away from them either.”

ABGI UK conducted a survey of the accountancy market in 2022 with a view to assessing firms’ attitudes towards outsourcing their R&D Tax Relief services.

The results showed an almost even split between respondents to who outsource and those who provide an in-house service.

McGrath goes on to argue that ABGI plays a largely unintrusive role as an outsourcing partner and draws on some of the other survey findings to reinforce his point.

For instance, among the respondents who offer an in-house R&D tax credit service, over 14 percent cited the ‘need to be a single point of contact for clients as the reason.

“That is a really important benefit for clients. They don’t want to be dealing with four different people – that’s just bad customer service,” says McGrath.

“So, in order to mitigate that, we work very closely with the accountants who outsource to us. We would never approach their client base unless they ask us to.”

The value of expertise

The ABGI survey found that 40 percent of those who choose to outsource their R&D Tax Relief service do so because of ‘insufficient expertise in-house’.

Expertise proved to be a key theme across the findings, with ‘confidence in expertise’ being cited as the primary motive for firms keeping their R&D service in-house.

For McGrath, much of this comes down to sector-specific expertise. This is much rarer and is critical for understanding the technical advancements that a company is trying to make, he says.

“If you spent £100,000 on R&D, the treatment of the number in the accounts is relatively straightforward. What isn’t straightforward is arriving at that number.”

“To arrive at that number, you need to understand the technical or scientific detail of the projects. That’s why ABGI believes that the majority of advice customers need is getting to that £100,000 number in the first place.”

The main consequence of this, McGrath adds, is that because it’s not reasonable to expect the accountant to fully understand the detail of R&D projects, the client doesn’t end up claiming everything that they’re eligible for or can inadvertently claim for things that are not eligible.

He explains that ABGI tackles this issue by having personnel with expertise in the client’s sector, most with PhD and equivalent qualifications from a range of STEM backgrounds.

However, he also notes that “issue-specific” expertise is arguably more important than sector expertise, giving the example of a manufacturing firm developing and increasing its use of software. A software expert would be more beneficial for the client than an engineering expert in this instance, he argues.

“It’s about looking beyond the sector that the business lies in and into the specific technology or science that they are advancing.

“That idea of like minds speaking to each other is very important – it makes that interaction much more palatable. That’s the expertise that we offer.”

The ABGI survey also found that ‘broader technical expertise’ was cited among 50 percent of participants as a factor that would make them consider outsourcing their R&D services in the future.

What’s the risk?

Another core benefit of outsourcing R&D for accounting firms is the mitigation of risk, McGrath says.

Official statistics published by HMRC in September show a 16 percent increase in the number of R&D tax credit claims for the year ending March 2020. This equates to £7.4bn in total support claimed, up 19 percent from the previous year (£6.3bn).

In response, HMRC announced in November 2021 that it would be hiring an additional 1200 compliance officers with a view to clamping down on spurious claims.

Several other proposals were also announced, including plans to track potentially spurious claims by the adviser who worked upon them.

“The risk to the accountants and their client is that HMRC could lodge an enquiry into their claim. If it is rejected, HMRC can then go back and look at previous claims that the company has made. So, you’re risking all of the previous claims as well,” says McGrath.

Based on this, he argues that an outsourcing partner must have the ability to spot any errors and prevent an ineligible claim from being made, be it deliberate or accidental.

“Because we understand the technical aspects of the legislation, we reduce the risk because we will guide them to not claim anything which could be considered spurious.”