Why I Hate “SR&ED Consultants”
(… even though I am one.)
This morning I received an invitation via LinkedIn that inspired me to write this post. It’s a topic that’s been irking me for awhile now. You may be thinking to yourself, “don’t you run a firm that specializes in SR&ED”? Yes, I do.
What is a SR&ED consultant?
First, let me explain my understanding of the term “SR&ED Consultant”. It is composed of two parts: SR&ED and consultant. The SR&ED portion is straightforward – it refers to the Scientific Research and Experimental Development tax credit program, which is quite generous if you are a business that qualifies. (Read about it at SR&ED Education and Resources).
The challenge is defining the term consultant. A generally accepted definition is that a consultant is…
an expert or a professional in a specific field and has a wide knowledge of the subject matter [1. Pieter P. Tordoir (1995). The professional knowledge economy: the management and integration services in business organizations. p.140]
Following this logic, someone who is an “expert” in SR&ED will have a “wide knowledge of the subject matter”. I personally ascribe to the theory that 10,000 hours makes an expert, as per Gladwell’s theory in his book Outliers (although others such as Seth Godin argue that 5,000 hours is sufficient). Further, it’s not enough to have put in the time – one needs to demonstrate competence. My definition of competence is when you have submitted over 100 SR&ED claims and had them “Accepted As Filed” (ie. no changes / challenges / reductions).
Naturally, while becoming an expert, one will develop the “wide knowledge of the subject matter”. Some of the relevant areas that a consultant will become intimately familiar with are as follows:
- Relevant sections of the Income Tax Act (248(1) amongst many, many others)
- All Information Circulars (particularly IC86-4R3), plus related schedules in relevant fields (ex. 97-1 in Software Development)
- The processes and procedures in their local tax office and all the local Research and Technology Advisors (RTAs)
- How to compile research related to the technology baseline, review supporting documentation, and ask questions that elicit the correct information.
- Unwritten, undocumented “red flag” words / terms the CRA uses to screen for “risky” applications.
- Tax Court of Canada rulings since the inception of the program (in particular, Northwest Hydraulics) and other cases that highlighted key concepts, such as SR&ED and business context or the importance of answering the providing sufficient information.
One can learn all of the above points without hands-on experience (ie. understand the theories); however, writing / preparing / submitting SR&ED claims provides an additional level of insight into the program (ie. experiential learning).
As you can discern, a background in technology, accounting, or law is helpful at the outset as you will have a head start towards becoming an expert. That being said, the results speak for themselves. Not all accountants think creatively. Not all lawyers can think within the box when required. It’s how hard you work towards becoming an expert in your field, assuming professional accreditation isn’t required.
The question is, how can the average business owner identify and avoid consultants that do not meet the criteria of “consulting expert”?
Sample “SR&ED Consultants” – Key Features
First, acknowledge that they exist. I’ve had a feeling there were sketchy consultants out there long before the Globe and Mail stirred up a controversy and tarred all preparers with the same brush. At networking events I’d often refrain from describing my profession. I’ve spent years building my business, why not promote it? It’s simple – people who were pleasant only moments ago would physically recoil when I would mention my specialization. Perhaps you’re familiar with this defensive posture?
It’s pretty difficult to continue a conversation when this happens. It’s literally “talk to the hand”. Ouch.
The inevitable conclusion from many of the knee-jerk reactions (“we’re ok” / “I don’t need SR&ED” / “oh….” *awkward silence, looking around*) is that there are people out there who don’t necessarily engage in ethical or even best business practices. Until today, I’ve managed to avoid most of them.
Here are some examples to help you pick out firms you probably shouldn’t work with…
SR&ED Sales Fail
First, why would you send this to another SR&ED consultant? Did you not read my profile? Yes, I have a technology company as well. Guess what? I’m probably going to do this in-house.
Second, why are you asking me for a recommendation? I’ve never worked with you. I don’t know you. What I’ve seen so far is that you haven’t proofread your email. That really, really bothers me given the services you claim to provide.
Third, your signature tells me you’re a one man show working from home. No disrespect intended towards those work from home – it’s fantastic. On days when I can do it, I love it. As the first unofficial day back (Jan 2nd), I’m in comfy clothes and I have a dog curled up at my feet while I catch up on emails… but for goodness sakes, set up your corporate email account.
If you’re a good SR&ED consultant, you’ll know why I included this posting. For everyone else, here’s why: a very, very basic rule is that non-arms length contractors are not eligible. If you own part of the company you should be salaried. Why? Because *nothing* is eligible if you’re non-arms length and skipping out on source deductions. Nada. Zip. Zero. That’s over $62K gone forever.
This is a simple point that he should have known. There are ways that – in special circumstances – this amount could be restructured. They’re extremely high risk and can be costly. Avoid the hassle by avoiding this type of consultant and seeking advice early in the development process.
This also illustrates the power of LinkedIn. Skim through the SR&ED groups and you’ll quickly identify the influential individuals. Then go to their profiles to review, compare and contrast. This individual’s profile showed a jack-of-all-trades-master-of-none. Avoid at all costs (lest you wish to lose another 62K).
Bait & Switch
This is an example of a job posting I’ve seen on several different occasions for one of the SR&ED boutique firms. I’ve pointed out in red a few key points (and spelling mistakes), but the takeaway is this:
If you knew that students were being paid $100 per 1400[2. 350+350+700=1400, not 1500.] words SR&ED technical narrative, would you pay 20-30% of your entire refund to the SR&ED firm?
The technical narrative is the most important part of the SR&ED claim. It’s the first thing the CRA reviews. Sure it’s supervised, but if you do the math… what are you paying for, exactly?
Attention to Detail
Tiny mistakes may seem insignificant, but they can cost you both money and time. Leaving a box unchecked can lead to serious delays or miscalculations of your refund. One error, recently made by a Chartered Accountant (more likely, their assistant) has meant a delay to the taxpayer by almost two months. Their file was “Accepted as Filed” but the money is sitting in limbo awaiting disbursement. In the land of startups, two months is an eternity.
These are only a few examples. I have no doubt there are more, based on the negative conceptions many people have of this group of professionals. Truthfully, I can’t blame them. It seems as though any technology company is considered fair game and is aggressively pursued by SR&ED sales teams. Unfortunately, the pushiest are not always the best. Below are a few ways to identify & protect your company from “cottage-country”[3. McKenna, Barry. Flawed R&D Scheme Costs Taxpayers Billions. In The Globe and Mail. Retrieved January 4, 2012, from http://m.theglobeandmail.com/report-on-business/flawed-rd-scheme-costs-taxpayers-billions/article1939418/?service=mobile] SR&ED consultants.
How to Protect Yourself
- Ask about experience. Remember those six points above? Start with those. Move on to asking about the latest ruling in the Tax Court of Canada. If they know SR&ED, they can discuss this in relation to existing practices at the CRA. Read this blog before you meet – so you already know the answers.
- Question the “success” statistics they quote you. Is it based on the number of files “Accepted As Filed” (quick refund) or total amount refunded? How long does it usually take them?
- Attention to detail is everything. Are there spelling mistakes? How do they present themselves? Sure, we’re all human and make mistakes. How do they correct errors? This is the business equivalent of a job interview. Mistakes due to inattention can cost you thousands in SR&ED tax credits. Save yourself the hassle and be ruthless in your selection process.
- Beware of bait and switch. Find out who will actually be working on your file. In a larger organization it will likely be a junior individual that is overseen by a manager. There’s nothing wrong with this approach; however, ensure that you (a) want this and (b) know the level of involvement of the senior individual.
- Review recommendations. Can they provide reference clients? What are people saying about them publicly? Some people are modest geniuses – most are not. Call and ask around about a particular individual or group. If you have concerns, discuss them. We’ve all fired clients or service providers, find out both sides. Trust your instincts.
- Are they accredited with the Better Business Bureau? How do they handle disputes or disagreements?
- Follow your gut. Recent research has indicated that we have a “second brain”.[4. Our Second Brain: The Stomach. In Psychology Today. Retrieved January 4, 2012, from http://www.psychologytoday.com/articles/199905/our-second-brain-the-stomach] Trust yourself. If it doesn’t feel right, move on.
Ultimately, it comes down to this: take your time and do your due diligence. Ask around, question everything, and see if it’s a good fit. Sometimes it’s worth it to pay more, but a big price tag isn’t necessarily an indication of quality. Most importantly, if you’re gut says this isn’t right – listen! There are more than a few great, ethical SR&ED experts in Canada. You’ll find the right one for you soon enough.
Update: It’s been brought to my attention that I’m not the first to write on this topic. Here is another great article on identifying ethical vs. unethical SR&ED preparers.
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