EP280 - R&D Tax Relief for MSPs – Are You Missing Out on Thousands with Jack Davies and Ian Luckett

IAN: In this week's episode of The IT Experts Podcast, we're going to share with you the R&D tax opportunity you could be missing out on thousands.

INTRO: Welcome to The IT Experts Podcast, the only podcast to help MSPs scale to 1 million, and if already there, get to five and go faster. At the end of the day, isn't it all about building a business that works for you rather than you for it? I hope you enjoy the show.

IAN: So good morning, good afternoon, good evening. Welcome to The IT Experts Podcast, and welcome back into the podcast lounge Jack Davies from PSS Tax. How you doing this morning, Jack?

JACK: Yes, very well. Thanks, Ian. Thanks for having me back.

IAN: No problem at all.

IAN: We're going to be talking today all about R&D tax credit relief for MSPs. Now, when I met up with Jack many years ago, a few years ago now, I was a bit skeptical about it. Like many of our MSPs because, you know, the Growth Hub is all about providing that safe opportunity, that safe place for MSPs to learn what they need to do to help them grow and build, you know, profitable MSPs. And Jack came skipping in and said, Hey look, this is a great opportunity. And I pushed back and I pushed back and I pushed back. And then a couple of our clients had some really great results. And, you know, there's a lot of businesses out there saying, yes, you should get this, yes, you should get this client the next shiny ball syndrome. Anyway, for the last, I think the last three years now, hasn't it, Jack, you've been helping, helping our clients maybe even longer than that, coming into the community and just offering some amazing advice. And we had a session the other day with a bit of an update on what's changing with R&D tax relief. Is it still relevant for MSPs? Where does AI fit into this? Is it, can I just do it for the standard automations? And Jack kind of came in. Shared the update and kind of what's going on with the MSP growth clients. And I said, Jack, we need to do a podcast about this. So we said, okay. So here we are, unless you've been living under a rock, and you might not have heard of Jack before, Jack, who are you, what'd you do and who'd you help?

JACK: Yes. So Jack Davies obviously worked for PSS, been in R&D for a fair number of years now, five, six years. And yeah, I sort of do at this point now, like you say, after many years working with yourself and other MSPs specialise really in MSPs for R&D. So my vast majority of my client base is now MSP related. And yeah, just essentially help people gain back that tax incentive for the brilliant work that most of the MSPs do day to day.

IAN: Brilliant stuff, and you've really got deep into the MSP community and you've been turning up to turning up to the events and learning what's going on and everything like that. And that's what we really like. So, you know, let's start at the top. What is R&D? What is it? Is it tax credit, tax relief? What is it and how does it work?

JACK: Yeah, so it's, it can become very convoluted, but in its essence, it's a tax incentive. And it rewards companies for undertaking technically challenging work, solving technical problems within. Whether it's internal projects, external projects and it can come in a few ways. So it can come as a reduction in corporation tax. In some cases, if you may be a loss making company, it comes as a cash injection straight into the business. Sometimes it can be a combination of the two. It completely depends on profit position, but in essence, it's a, it is a reward for undertaking those technically challenging projects. And yeah, I think a lot of MSPs don't sort of realise they do it, but when we look at the core part of it, which is technically competent professionals, overcoming technical challenges, when I say that to most of my MSP clients, they go, well, we do that every day. And it's exactly that, yeah. That it is essentially what you do every day. That's it in a nutshell. It can be done straightforward if it's not over explained.

IAN: No, that's great. That's exactly what we wanted to hear. So, you know, for the typical MSP let's start off with it. Let's start with it. The other way round. What is it not, what can you, you know, what is it you hear all of this great stuff, yeah, come and claim. And the last thing that we want to be doing, and by the way, this isn't financial advice. This is just an opportunity you can connect with Jack and see if you're a right fit for doing this. You know, there's a lot of snake oil out there. There's a lot of people claiming that they can kind of do it. So what is this not?

JACK: Yeah. Great question. I think it's not just a, like you say, a quick cash grab or a tax avoidance or something silly like that. It's not, some people go, it sounds like PPI and I get where that sort of.

IAN: Yeah.

JACK: Attitude comes from. But no, it is supposed to be a real strong reward incentive. So HMRC want people to undertake these types of projects because it contributes towards UK infrastructure. It contributes towards where we're at as a country. What have we got in terms of the new things that are coming out like AI, are we integrating these types of things into our day-to-day operations and services and that's what they want. So it's a reward incentive basically. We don't want be looking at things that are bog standard. Oh yeah, we'll just plug and play and that's it. That's not what R&D is. It's about those technical challenges that you're facing. It's about that real bespoke work where you're having clients come to you saying, we need X, Y, Z. Okay, great. Well we've got to go figure out how we get to that. Usually it's not a case of, oh yeah, it's dead straightforward and we just take that, we plug it in and it works. So it's not for those dead straightforward things. It is not the this sort of dodgy avoidance. It really is an incentive HYC of the targets for what they want to put towards R&D and how much they have in terms of innovation funding. They have targets for that, so they want people to access it. They just want it to be accessed. The correct way for the correct things essentially.

IAN: Yeah. And this isn't you know, like quick fix, quick bit of corporation tax back. Let's just happen because you know, the one thing we want to do with everybody on this podcast is protect their reputation. So, you know, for ourselves, and for you Jack, and for the MSPs, you know, we want to be known as having great quality businesses. And we've had some clients who've had a really great first year where they did their you know, the claim the first year and it went through and the second year there wasn't a claim because the types of work that had changed over. So it's not a given, it's not a, you know, it's making sure you are doing the right thing as Jack is to make sure that we are being incentivised for doing automation and you know, and these types of projects. So what types of things does it include? What are the standard things that it includes? And then, you know, what, have you got some surprises of some things where people have gone. I didn't realise I could kind of claim that. What does that list?

JACK: Yeah, I think, you know, I think especially some conversations we've had with a few people in the Growth Hub off the back of some of the work we did last week, there seems to be a few little things where people are like, oh, I didn't realise I could claim for that. So, I think sort of typical projects I tend to see are things around system integrations, data migrations, automation, cloud migrations. That's the implementation of AI now, cyber security. So there's loads of different things that MSPs will be doing all the time. The core of it is back into those technical challenges. So often with things like system integrations, you might have a client that comes to you saying, right, we've got a new system we want to integrate. We've got three other systems internally that we want it to work with, and we want it all to work together. There's quite a lot of things going on there. So, we might start working on that and then the MSP might go, right, yes, we can do that. So they start working on integrations. They start doing scripting, they start implementing APIs, potentially putting AI involved as well. And as you start doing these things, you might have systems one and two working absolutely fine. You try to put system three in. It causes problems. So we're coming all the way back to the beginning and it's very iterative and there's going to be a lot of trial and error. There's going to be a lot of coming up with different solutions that. Straight away. We're straight into, right? Well, we've got problems that we're facing. They're of a technical nature. There's not just going to be a plug and play or a solution where you can Google it and it's going to work because it's going to be too bespoke to that client and to those systems that they're using. So as we come up with those solutions and we eventually get to the angle that's your R&D, you've used your technical competencies as a professional to overcome technical challenges you faced within a project. So that's it at its essence. Then when we start looking into, okay, well what might be the surprising, I think a lot of people don't realise they can claim on things like their own software costs. So that was one that came up the other day.

IAN: Mm-hmm.

JACK: If you are using all this software to be able to then deliver those projects, well straight away, their types of costs that you can claim on you subcontractors, you pay a YE time. All these things go into delivering these projects. So they're the costs that you're able to claim against. And I think definitely, like you said the new sort of areas around AI and how we integrate AI into people systems, people's day-to-day services that they're offering, I think is a big one at the minute that people are sort of claiming on a lot more.

IAN: So if you are an MSP and you are helping somebody, use copilot as it would be, for example.

JACK: Mm-hmm.

IAN: You know, giving them instructions on how it's kind of using and that sort of thing. Is that claimable or not? That doesn't sound very claimable.

JACK: No. Like you say. So just sort of giving instructions on this is how you use it. Not so much. Now, if you had someone who had to co-pilot, and then they wanted to integrate something else to it, or they wanted to add a functionality to it, they, it currently doesn't offer. And then we go into how we do that and how we actually get that integration going or how we add that extra function to it. That's a direct improvement on the technology in itself. And the functionality that it has to straight away, then you're into Yes, that's your R&D element is improving upon that technology, improving its functionality. Improving the capabilities it has improving, can it now share information with different systems that it wasn't able to previously. That's where you sort of get into the realms of your R&D.

IAN: So if you had a project where you were, if you were, let's say that you were integrating somebody's database with copilot and then you were trying to get it to do something a little bit more interesting with some you know, scheduling around another tool and things like that. It's that API connection is the part that then becomes the, you know, that's classed as innovation because you are, although most MSPs will just go, that's work, right?

JACK: We do. Yeah.

IAN: But this is innovation on that project side. So setting it up is the area that you get the cost relief from rather than running it. Yeah?

JACK: Yes. Yeah, exactly that. So it's all that time spent, essentially. So it's all that time spent working on, okay, what's the project? So right from the inception, you've got a client that comes to you, or like I said, this might be something you're doing internally as well, which I think a lot of people don't think so much about. These might be improvements that you're making to you internal systems. That is absolutely fine. It doesn't need to be an external thing for a client, but either way, whether it's internal or external, if we're looking at right straight from the start, what's the goal that we're looking to get to, right? Well, we've got this system, we need it to do these additional things. Okay, now we start getting into how do we get it to do that? So as then we go through the work, the trial and error, the testing of how we can get it to get to that point all the way through to delivery, and then potentially even aftercare as well, because you might, as you're go in through these things, think. Actually, we noticed as we were going that it could also do with having this and this, or you might improve its ability and efficiency to do the thing that you got it to do. That might all be ongoing stuff as well. So it's this continued development, which happens a lot with clients' internal projects I find is that it's just continuous. As they're doing the development, they're like, actually, we need it to do something else. We need it to do something else. And it's this constant movement of internal projects. I think that's really big for MSPs that they overlook, because they just do it. Like you say, we need it to do this, so we're going to, we're going to develop it as we go. But it's a lot of good development, a lot of the time that happens internally that people.

IAN: No, that makes sense.

STUART INTERRUPT: Hold that thought for a moment Ian, it's Stuart here. I just got a quick pit stop here for everyone that could really move the needle. If growing your MSP is on your radar, but it feels somehow a bit foggy, a bit difficult to get your arms round the concept, then download our ultimate MSP growth guide because it lays out all of the best support options that are out there in the channel so you can fast track what really works for you and make a clear decision. Alternatively, you may be the kind of person that likes to see things up real for yourself in action physically. So why not come to one of our events where you can do exactly that? And we'd love to meet you, so there's just a head up for you down in the show notes that you'll find the links to be able to take the next step. But otherwise, let's get back to the good stuff and back to the show.

IAN: Cheers.

IAN: And then is it quite simple as, you put some project costs towards it, it could be 10 grand or 15 grand or whatever it might be, and then that comes off your corp tax bill, or is there some allowances and calculations that go around that? How does the calculation work?

JACK: That's sort of a little bit more where we come into it. It's quite specific how it works. So essentially what we look to do is we gather sort of case study examples. So we'll talk about these types of projects that MSP's undertaken and we'll gather the sort of core examples. So maybe the four or five best projects that they've done through that year. We will case study those and turn those into a dissertation like style report. But like we've just discussed, there's going to be loads of projects throughout.

IAN: Yeah, yeah.

JACK: An M-S-P-G-A that they're going to have done these types of activities on HMRC, don't want to see 40 case studies, no one's going to read it. Basically, it's too much for them to go through checking that many case studies. So what they want is an example. And then with the costs we are claiming on the time spent across these types of activities on all projects, not just specifically the ones we're case studying. So we will look at your staff costs, your subcontractor costs, your software license costs, and we will basically get those for the entire year. And then we're claiming on a fair and reasonable estimation of time spent on those types of activities across the year. So it's not so specific as, yes, there's 10 grand for that project that comes off you it goes through a system of all your costs across all these types of activities for the year. Everything gets assigned a time spent on R&D. That's a fair and reasonable estimation. And then that goes through a calculation that gives you essentially the tax rate.

IAN: Okay. So cost accounting, you know, making sure that you are accounting for your projects properly. You know, your subcontractor costs your software cost. Good old fashioned like standard chart of accountants is kind of what we're looking for here to make it a little bit easier, aren't we?

JACK: Yeah. Yeah. I think it's really important to like, definitely have a good track on those types of things. Have good like, cost pulls assigned to them. So you've got a good solid code where, you know, that's where my subcontractors are, that's where my software licenses are it just makes it a lot easier to pull that information whenever you need it for something like this that doesn't make it as then time consuming and difficult to get. And I think the same thing with projects as well. I think it's really important, especially if this is something that you feel you are doing a lot on in terms of projects. It's good to just maybe make notes of the ones that are the most difficult, that are the most challenging as you go through the year. Because this is something you can do yearly. So you want to be looking to do it every single time you finish a year end. You want to be putting this in with your tax returns. So if you've sort of had a little bit of a track of, yeah, these are the projects that have given us the most difficulty. It makes it very easy when you get to the end of the year to do this instead of having it as now I've got to go back and think about everything.

IAN: Okay. And do you work with the MSP's accountants in tandem, or how does that kind of relationship work?

JACK: Yeah, so again, that completely dependent on what the MSP wants, how involved the accountant wants to be, because it's not something the accountant necessarily has to have a lot of involvement with, barring maybe just sending over a couple of documents, directly to the client themselves or to us. But usually I say to people, yeah, it's good to introduce us to your accountant because, like you mentioned before, and they might not have a lot of experience with it. Yeah, it might be something that they're a little bit uncertain of. Yeah. So we can always help them with it as well, which is sort of a key thing. We try to help everyone with it, not just the client, but their accountants as well. So they've got a good understanding of, well, what it is, why does it qualify? But usually accountants are normally pretty good with us. That they want us to help the client out because they know that RD can be quite tricky. So if they know we're good at what we do they're usually pretty, pretty, sort of helpful in terms of getting everything over. And like I say, there's some scenarios if you want the claim to go through with your original returns. Usually that will be done by your accountant, so we will help them by prepping absolutely everything. Send them really comprehensive instructions of how to include the R&D, and then it can go through with your original return. So, yeah, there's quite a lot of sort of collaborative work with clients account, I'd say.

IAN: Good. But things have changed, haven't they, in the last year or so, they've had a bit of an update. What are some of the updates and changes to the scheme that are now different to where they were kind of like 18 months ago?

JACK: Yeah, so I think it's important. I think a lot of people, definitely over the past 18 months, I've been worried that there's been these massive legislative changes. And then worrying that, okay, does that mean that my work doesn't qualify anymore and that now this is something that's not available to me. The pretty much all of the changes that have happened over the past, I would say two years have not been to do with. The type of work that qualifies, but more so to do with improving the process of how people claim.

IAN: Okay, cool.

JACK: So that's been the majority of the legislative changes. Now that comes down to a few different things. So they've started to move away from the split scheme, which was where we had a scheme purely for SMEs and then a separate scheme for large companies called the R deck scheme.

IAN: Right.

JACK: They've now moved it towards a merge scheme so everyone claims in the same way now and it's becoming above the line credit, whereas previously it was a below the line credit. So that's sort of the key changes that have come now. It's made it much more simple. It's a lot more straightforward now because we know, right? This is the set amount that everyone's claiming. It's all under a set scheme. The legislation's now stabilised across everything. So that's sort of one of the key changes that's made everything a lot more straightforward, I would say. With that's come this sort of new pre-notification form, which we, we've had a few talks about, but I think this is something to be really aware of for people is if this is any anyway, something you think is relevant to you, there's now a requirement to put into called a pre-notification form within six months of the year end. So it's really a box ticking exercise, but it's to stop people just making, in certain scenarios, claims that shouldn't have been going through. They were able to go through loads of retrospective years and it would make it difficult for HMRC to monitor them properly. So now it's just a little box tick exercise, which is just basically putting in two examples of projects, couple of lines description, just to give the intent that yes, we're going to look to make a claim for that accounting period. No one gets in touch about it. It just goes through automatically.

IAN: Yeah.

JACK: But it's just that intent of following the process correctly. And yeah, I think there's been a sort of more focus on the evidence being correct. So instead of just a random technical report going through now, it's, sort of an AIF form is what goes through, it's called an additional information form. And it's become a standardised way of providing the evidence. So there's not just everyone putting through random things in different formats. It's one set format. It has to have the case studies in there correctly. It has to have certain things in there correctly. And it all goes through nice and simple as an AIF format. So it is become much more straightforward, but none of the actual conversation around what does this qualify? Does that qualify, has none of that has been reduced. If anything, from an MSP's perspective, it's been increased because they said things like cloud work and that type of area has now actually been added to the legislation over the last couple of years. Whereas previously it was a bit more of a gray area in terms of things like cloud development and cloud work. They've actually added that in to the legislation. I'd say that's something that, that, that really does qualify well.

IAN: Because you can't claim back two used to be used to on your first year. You used to be able to claim back two years, didn't you?

JACK: Yes. Yeah. Yeah. Whereas that's now obviously been restricted via the pre-notification form, because you wouldn't have put the previous claim. Just to be aware, for some people, if you have claimed previously, there is an exemption window for the pre-notification form, so there may be some scenarios where you can still get in one or potentially two retrospective years. If this is something you have looked at in the past and maybe missed a year or something. If anyone has that sort of scenario, they can reach out and I can explain how that works. But yeah, essentially there is an exemption window If you have claimed previously that what they're trying to do is not damage. People who've claimed historically, they're trying to stop people putting in loads of claims that maybe aren't.

IAN: Yeah.

JACK: Legitimate. And that was like a bit of a sort of issue they faced. Definitely like, I would say five, six years ago, it was a lot of people just putting in random things. They were able to just put in multiple years at once. So HMRC basically weren't able to check everything. So that's where all these reforms have come from in terms of just trying to get it to the point where it's a solid process, not having loads of inquiries flying about, and we're not having people making claims that shouldn't be getting made essentially.

IAN: Okay. Okay. No, that all makes sense. It sounds like they're, they're trying to improve that process, so that's all good news. Obviously we'll come onto contact details in a minute if someone wants to continue the conversation with yourself. And there's lots of people out there who also do this as well. What do MSPs need to look out for? What does best practice, I guess yeah. First, first thing, what does best practice look like? If you are going to go to someone you know, like Jack and ask for, some support to do your claim, and also what are the red flags that you see out there in the industry that the listeners need to be careful about.

JACK: Yeah. There's a lot of, I think, sort of red flag buzzwords. I think a lot of these people who maybe aren't great consultants have probably been caught out a bit now because of these changes. And you do have to have a solid process, otherwise you physically aren't going to be able to make claims to people if you don't understand it correctly. So I would say that, things like being aware of the pre-notification form. If they're not telling you about things like that, if they're not explaining to you how the process works in terms of the types of case studies you need, if they're saying, yeah, we'll just do one and we'll put it through. They sort of red flags things, buzzwords like, oh, we've got a hundred percent success rate. We never get an inquiry. None of these things are true.

IAN: Yeah.

JACK: There'll be almost no one who will have not had an inquiry. Well, every single R&D consult will have had inquiries because it's a mandatory random inquiry process. So they do it randomly and it's mandatory, so it's definitely going to happen. And the inquiry rate recently has been relatively high over the past couple of years while they've been trying to check these changes to the legislation are being followed correctly. So that's coincide with each other. We are starting to see a bit of a trend down on that now. I think now that the merge scheme's come into place, it's sort of trending back a little bit, but for anyone to tell you they've never had an inquiry is not going to be the case.

IAN: Right.

JACK: In fact, you would almost want people who have dealt with inquiries because you want, if you get one, you want your consultant to be switched on and know how to deal with those because they can be quite time consuming. Definitely having that in there as a free service as well. If it's not in there as a free service to defend the claim as part of the initial fee, then that would be a red flag. And anything to do with them taking the benefit into their account first, which I think is a thing that's...

IAN: Yeah. You mentioned that.

JACK: Times, that's a big sort of red flag. Yeah, they'd be the key points.

IAN: Okay. Yeah, so there's a couple of highlight highlights there. We've covered a lot. Anything that we've missed off Jack?

JACK: Nothing major, I think. I think just definitely if this is something you've looked into in the past and not felt it was for you, I think it's worth, worth revisiting. I think that's sort of the key thing. It is always worth looking at what you've done recently, is that actually something that fits in with these new changes to the legislation that have increased for MSPs?

IAN: Great stuff. Okay. No, that, that's all good. That's been a really useful, been a really useful podcast. Thanks for that. I'm sure many MSPs will be interested in, you know, in, in doing that if they wanted to have a conversation with you. The one thing I would say is if you do contact Jack, just tell him you found out through the podcast, it'd be really useful. So we know that but this is kind of working. How do they get in contact with you, Jack?

JACK: Yeah LinkedIn email. My email is just jack@pssax.co uk. There's an email there. I'm going to have a booking link on my LinkedIn as well. So anyone's welcome to just put half an hour in and have a discussion. But yeah, either or if you, LinkedIn, email, if you just want to have a chat, ask a question if you've had difficulties with it in the past, anything that, that anyone needs any help with, I'm happy to just offer some advice as a first point.

IAN: Brilliant. And if you let us have those links Jack will pop those all in the show notes so everyone can just find them nice and easily. So, brilliant stuff. Well, thanks again for the great work you're doing with our clients. Certainly helping out and all the best for the rest of the year. May it continue to succeed.

JACK: Yes.

IAN: Lovely.

JACK: Thank you very much.

IAN: Look after yourself. Take care. Bye now.

JACK: Bye.

And if you've ever struggled with your MSP running, you rather you running it, then you do not want to miss next week's show. I've got a power panel. I've got MIT Patel, I've got Darren Strong, and I've got Paul Green all on the same podcast all at the same time. I'm going to tell you now, it's going to be an absolute riot just before the MSP show on the 13th of May where we're going to see everybody there on an amazing panel. Don't miss next week's show. It's going to be an absolute cracker.

OUTRO: Just before you go, and if you're curious about how this episode links with the ability to scale your MSP to a million or, or if you are already there, accelerate to five, then we want to invite you to come and take the MSP Mastery quiz, and in just three minutes, you're going to get a 360 degrees scan of your business where you can identify the one or two tactics that can help you find more time, engage in, align your people and help generate more leads in your MSP. It's really simple. Just click on the link in the show notes and if you have enjoyed this episode, we'd love to get some feedback from you by means of a rating review on Spotify or iTunes, or your podcast platform of choice. We really appreciate every single one of them. Now, you can go and enjoy the rest of your day and we look forward to catching up and connecting with you soon. All the best.