HMRC scrutiny driving surge in R&D outsourcing, expert says

An intensifying compliance landscape is driving a significant trend of UK accounting practices outsourcing their research & development (R&D) tax credit accounts to specialists, according to R&D consultancy ForrestBrown.

The UK government has introduced a flurry of new measures to the R&D regime in recent years in an attempt to crack down on increasing levels of fraud. Key changes include a new rate for R&D intensive SMEs, the inclusion of cloud computing, data licenses and pure mathematics into the scheme, and restrictions on overseas expenditure.

From 8th August 2023, businesses claiming R&D relief must also submit an additional information form disclosing the activities undertaken and the project costs.

But the chaotic pace of change has provoked much criticism from the business and advisory communities. Kelly Oakley, associate director at ForrestBrown, argues that this has sparked a shift in approach among many accounting firms, with outsourcing now a more popular choice than ever before.

“Over the last few years, it’s been accountants that do R&D themselves, but who just want somebody to come to when it’s a really complex, gnarly case. But that’s changed again recently – we’ve had a lot of accountants approach who are changing their approach in this new landscape.”

‘Increased levels of risk’

Oakley’s view is evidenced by recent polling of accountants by ForrestBrown. The findings show that nearly two thirds (61%) of those polled reported increased levels of risk to their practice as a result of the changes, while almost a third (28%) reported that their team no longer want to work on R&D tax claims at all.

ForrestBrown also questioned accountants on specific challenges they face in relation to R&D, with half of all respondents reporting that they have disagreed with HMRC over technical interpretations in claims submitted. Oakley argues that this is a significant factor in firms reporting increased levels of risk.

“A lot of accountants are finding that they’ve had more enquiries than they would’ve done before, and that they’re struggling to be able to answer HMRC’s questions on them satisfactorily enough to be able to close the inquiry,” Oakley adds.

“That is making them realise that they don’t have certain types of sector expertise, such as software developers. Software is a particular area that a lot of accountants tend not to understand on an intimate level.”

Outsourcing vs in-house

But Mazars, a top-10 accountancy and advisory practice in the UK, is one example of a firm keeping its R&D work firmly in-house. While acknowledging that the R&D landscape “remains complex and requires specialist guidance”, the firm’s tax director Chris Ridley argues that, if correctly equipped, firms can offer a greater quality of service by avoiding outsourcing the work.

“We find that clients prefer to have the wider advisory offerings that we can provide in-house, as we have a fuller understanding of the client and their business and can leverage this knowledge into wider and more personalised opportunities.”

Ridley goes on to explain that Mazars is able to substantiate this with a range of expertise and specialisms, including a team of software developers. Software development makes up the largest amount R&D claims submitted to HMRC each year, he adds.

“Given the scale of Mazars’ integrated international partnership, we are fortunate to directly employ highly skilled software developers around the world. Our experts not only actively guide their own clients in this areas, but also support our R&D specialists in determining whether the activities undertaken meet the definition set out in the official guidance.”

Talent a barrier for many

While Mazars is able to benefit from its international presence, Oakley stresses the recruitment and retention issues being felt by many smaller and mid-market firms in the UK, arguing that outsourcing can provide critical relief in a challenging climate.

“Recruitment is a huge issue at the moment, so a lot of accountants are thinking about what they can move off their plates, and R&D is one that they often land on.

“What happens most of the time is an enquiry makes the accounting firm realise that they don’t have the right expertise. So it’s about really considering your R&D offering and whether you have that technical expertise to be able to create a robust claim for your client.”

Oakley also notes that R&D tends to make up a relatively small proportion of a firm’s work in an average year, and so even with the right personnel, the inactivity can be a factor in preventing advisers from staying sharp when it comes to the intricacies of the claim process.

“It’s not just the tax part of doing an R&D plan, there’s the technical part of it. Putting a claim together can be quite difficult when it’s not a subject you know about,” she says.

“If you’re only doing 5 or 10 R&D claims a year, it’s really difficult to have that knowledge of what HMRC expects.”