Should you use an R&D Tax Credit Specialist for large claims?

Innovative

Intuitively, when you look at percentage rates, it seems like the bigger your claim is, the more expensive the tax credit specialist is (if you’re using a contingency fee service), and therefore the less valuable it is to use them. After all, if you have a claim of £100k and your specialist is charging you 20%, that’s £20k of fees. Surely that’s too much?

However, this is a situation where intuition fails to account with factors that are not quite so obvious, but are very important.

There are three factors that lead to specialists being dramatically more valuable as your claim gets larger.

1. The added value factor

Specialists can typically increase the size of your claim, through their knowledge of the scheme and of how to correctly argue the claim with HMRC, if it is queried. However, this increase is driven by: 1) how many things you’ve forgotten to claim, and 2) how many things you’ve claimed, but not a high enough percentage.

Typically, the first driver is non-existent for very small claims. If you have just two people in the company on minimum salary, it’s pretty likely you’re not going to forget one of them. On the other hand, for a larger company with a few dozen people, chances are you’ll miss out on some atypical “Qualifying Indirect Activities”, which will add up to a fair amount.

The second driver is obviously relative to your claim size. Through discussing the role and involvement of each person in the team, a specialist can help you find the right percentage of involvement to assign to each person who worked on the qualifying project. This may impact small claims too, but the impact will be a proportion of the size of the claim – 10, 20, 30%. On larger projects, when that adjustment is propagated among many people, as well as people that were initially omitted, it adds up very quickly to substantial amounts.

In some cases, we’ve seen the increase of the claim size exceed 100% – we were able to more than double the claim size. This puts a 20% fee in perspective.

However, at small claim sizes, this doesn’t exactly work. Few specialists will work with you on a percentage basis if the claim is too small (it doesn’t make commercial sense) though some will agree if they get a fixed fee. However, if your claim is only a few thousand pounds, you run the risk of spending most of that claim on paying the specialist. Not a great deal.

From this point of view, specialists make much more sense if you have a larger claim.

2. The risk factor

It is intuitive and correct that larger claims will get more scrutiny. Tiny claims can also get bashed by HMRC (they seem to particularly like claims that look poorly structured, which they feel they can push back more easily). This is similar to the situation with accounts, where HMRC will inquire into accounts that lack an accountant more often than into those prepared by an accountant.

However, by and large, if the claim isn’t prepared really badly and it’s small, chances are HMRC will let it pass without inquiry.

On the other hand, a £100+k claim will often get a second look. And a third look. And a meeting. And some questions. After all, these are pretty solid amounts of money. If the claim is prepared extremely well by a reputable specialist, the chances of audit are lower, but still very real.

If you do have an audit on a large claim, then having a specialist there to coach you and help you argue the case is extremely valuable, for obvious reasons. Even more valuable is if the specialist prepared the claim in the first place – then they are very strongly incentivised to make the best case possible for you and ensure you walk away with most of the claim intact.

Another impact is that a specialist will try to maximise your claim in a way that doesn’t go beyond the boundaries of what HMRC accepts. Anyone can be aggressive and push all the numbers up, but a specialist will have a strong incentive to closely navigate the line of what HMRC considers acceptable, rather than going over that line. After all, they also want to avoid attracting undue HMRC attention.

At large claim sizes, the risk reduction of having a specialist involved is well worth the cost.

3. The attention factor

Finally, one factor that is perhaps least obvious of all is the cost in attention – in particular, senior management attention.

For SMEs, R&D Tax Credits, because they deal with both tax/HMRC and the technology developments of the company, are the kind of multi-function, high-level issues that will require one or more Directors to spend time on managing the project. Director time in a growing company is a very scarce resource. I certainly would recommend that it’s spent on growing the company rather than on routine tasks like filing tax credits or calculating payroll taxes.

When the company is tiny, this is less of a problem, because very early stage companies are often more time-rich and cash-poor, rather than the opposite. But rapidly growing companies (post-product-market-fit) have the reverse problem: they have enough cash, but nowhere near enough time.

So for rapidly growing companies with larger, growing claims, it makes the most sense to delegate a complex, specialised issue like R&D Tax Credits, to an R&D Tax Credit Specialist!

Conclusion

As a final nail in the coffin, it’s worth pointing out that most specialists (including us) offer a variety of pricing points. For example, for larger companies that aren’t worried about cash flow, but want to retain more of their claim size, we offer a £10k upfront service. This limits the fee to a reasonable level, and can be a good service to switch to later on in the life of the company.

The best approach, in my opinion, is simply to either ignore tax credits or file them yourself until the company reaches a few tens of thousands of pounds of annual R&D spend, then go with a specialist on contingency fee (ideally priced about 20%) for the next few years (usually a 5-year contract), then, once the contract runs out, if you’re large enough by that point that your yearly fees exceed £10k, switch to that model.

But whatever you do, don’t get the idea that just because your claim is large, a specialist is bad value for money. The larger your claim size, the more valuable specialists are.

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