But figures released by Her Majesty’s Revenue & Customs (HMRC) last September show that in the previous tax year, the industry received only about £250m – or 4.7% – of all the R&D tax credits provided by the government.
So what is R&D tax relief, and how can construction firms get a bigger slice of the pie?
What is R&D tax relief and why does it exist?
R&D tax relief offers UK businesses an incentive to undertake research and development (R&D) activities that might increase the knowledge or expertise in a particular field of science or technology.
This might be a project to create something new or it might be intended to significantly improve a product, process, service or system. To qualify, there needs to be some scientific or technological uncertainty associated with the R&D effort.
Other countries have been providing R&D tax incentives for more than 50 years but the UK only introduced them in the tax year 2000-01.
What benefit is available?
Currently, there are two distinct R&D tax incentive regimes available in the UK: one for small-medium enterprises (SMEs) and another for large companies known as Research & Development Expenditure Credit (RDEC).
Under the SME regime tax relief is available on 20% - 33% of the qualifying spend.
Under the RDEC the benefit is 13% of the qualifying spend.
To be considered an SME for R&D tax purposes, you need to satisfy the following criteria:
• Fewer than 500 staff
• €100m (£86m) turnover or €86m (£74.16m) gross assets
What sort of R&D activities are eligible?
For an R&D project to qualify for tax credits, it must satisfy two basic criteria:
• That it is attempting to achieve an advance in a field of science or technology
• That it addresses some scientific or technological uncertainty
By ‘advance’, HMRC means any of the following:
1 Increasing the knowledge or capability in the chosen field, including via the transfer of knowledge from another field of science of technology
2 Creating a new process, material, device, product, service or solution
3 Improving an existing process, material, device, product, service or solution
4 Duplicating the effect of an existing process, material, device, product, service or solution. For example, a product that has exactly the same performance characteristics as existing models but is built in a fundamentally different manner.
‘Uncertainty’ exists whenever it is not obvious, nor readily deducible by a competent professional working in the field, whether something is scientifically possible or technologically feasible.
Uncertainty can also arise from turning something that has already been established as scientifically feasible into a cost-effective, reliable and reproducible process, material, device, product, service or solution.
Uncertainties that can be easily resolved are not scientific or technological uncertainties. Similarly, improvements, optimisations and fine tuning which does not materially affect the underlying science or technology are not eligible activities.
What R&D costs can be claimed?
You can claim the following costs associated with the eligible R&D activities:
Staff costs – including salaries, employer’s NIC, pension contributions and reimbursed expenses.
Materials and consumables – such as heat, power, fuel, temporary works systems, prototypes – that are not ‘recovered’ through recoupments, payments or sales.
Subcontractors (SME) – such as specialists undertaking R&D on behalf of the claimant.
Subcontractors (RDEC) – qualifying bodies such as universities and technical bodies.
Externally provided workers – labour provided by third parties where the claimant actively directs, controls and oversees the labour which has been provided.
Software – licence fee for software used for undertaking the R&D activities e.g. Revit, MATLAB, ZWSOFT, MechDesigner etc.
How do I claim?
Once you’ve sorted out your eligibility and identified your claimable costs you must:
• Submit your corporation tax return and associated R&D tax schedules
• Provide supporting technical information (i.e. how your activities meet the technical eligibility definitions)
• Provide supporting cost schedules linking eligible costs to eligible R&D activities
• Provide an overview of the R&D methodology which has been applied
• Confirm that the Department of Business, Energy & Industrial Strategy (BEIS) guidelines, legislation and HMRC’s guidance note have been read and understood
• Ensure key supporting information is kept on file (e.g. contracts with third parties, technical scoping documents, design drawings, feasibility assessments etc.)
Case Study 1
A company created a cladding system which had the appearance of ‘normal’ brickwork but incorporated the capacity for off-site fabrication, improved fire protection and suitability to fast-track production.
Mechanical fixing rather than wet mortar provided strength and durability, which together with the capacity to construct in all weather conditions provided significant cost savings.
Uncertainty: The uncertainty of the materials in the cladding system and the technological uncertainties surrounding fixing were qualifying R&D activities.
Advance: The development of an off-site system that improved site assembly and saved money was a qualifying technological advance.
Case Study 2
A company wanted to design, fabricate and install four large acoustic sheds to prevent noise, dust and light affecting surrounding residents. Piled foundations could not be used due to limited space but strict settlement limits were necessary to ensure an acoustic seal was maintained.
Uncertainty: It was technologically uncertain whether or not the acoustic sheds would deliver the performance required while supporting heavy moving machinery without piled foundations. It was also uncertain whether new connection details could be developed to ensure the acoustic and dust performance was met.
Advance: An advance was achieved by creating a process whereby two 60-tonne cranes could be supported on the foundations and base plates without the need for piles.
Case Study 3
Coping with Covid
An RC frame contractor was using a slipform process to construct the central core of a new multi-storey building.
The process required the slipform to be manually released, hoisted by crane, and then manually fastened into place.
With the onset of Covid-19 it was found that this operation could not feasibly be undertaken in line with site social distancing requirements.
The contractor designed a new hydraulic climbing rig for use in lieu of the original slipform.
Uncertainty: The technological uncertainty was how to design a hydraulic climbing rig that could withstand the imposed loads, provide the required rigidity, produce the desired surface finish and self-raise.
Advance: The project demonstrated an advance by developing a new autonomous climbing slipform.
To prevent abuse of the system by loss-making SMEs, the government now restricts the amount of R&D tax credit a company can receive in any one claim period to £20,000 plus 300% of its total PAYE and NICs liability for the period. The new restriction applies (with certain exemptions) for accounting periods beginning on or after 1st April 2021.
In March this year the government launched a review of the R&D tax landscape to ensure it remains fit for purpose. The review will conclude in June 2021 and will focus on three key areas:
• Whether or not the current definitions accurately reflect how current R&D activity is conducted and if the tax reliefs are competitive at an international level
• How the reliefs are working for both companies and HMRC and where improvements can be made
• The best way to target tax relief to ensure that the return on the investment into R&D by the government is maximised for the UK economy.
• Since the scheme began in 2000-01 HMRC has recorded over 300,000 claims
• The total amount of R&D tax relief claimed to date is approximately £33.3bn
• In the tax year 2018-19 there were 59,265 individual claims for R&D tax relief of which 52,160 were SMEs
• HMRC reported more than 7,000 RDEC claims for the tax year 2018-19
• £5.3bn of R&D tax relief support was claimed in 2018-19
• The average claim under the RDEC scheme in 2018-19 was over £330,000
• The manufacturing, professional, scientific & technical and information & communication sectors have the greatest volume of claims, making up a total of 66% of claims and 71% of the total amount claimed for 2018-19
• In the tax year 2018-19 there were 3,125 claims in the construction industry
• The total value of construction sector claims (2018-19) was £175m
• The average amount claimed for construction R&D tax relief was £56,000
**About the author: Justin Arnesen is a business tax specialist with financial and professional services firm Smith & Williamson