Why is the construction sector not claiming R&D tax credits?

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Gateley Capitus

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The most recent HMRC figures show that less than 5% of claims made for R&D tax relief have come from the construction sector. For such a large sector that generates income of over £118bn a year, why is it only claiming £235m through the scheme?

The claims from both SMEs and large companies for 2108/19 tax year number 3,340 (to date, this is likely to increase slightly), that is around 1.1% of the companies registered in the construction sector. 

The figures show that there is still a lack of awareness of the scheme in this sector and maybe that companies are quick to dismiss the possibility that some of their projects would qualify as ‘research and development’ for the purposes of the scheme. 

With an average tax benefit of £70,359 per claim, it is time for the sector to take a closer look and to consider the interpretation of ‘research and development’ they are using when considering such claims. The one to look at is HMRC’s.

What is R&D tax relief?

R&D tax relief was introduced in 2000 to encourage and incentivise UK businesses to undertake research and development (R&D) activities, as the government wanted to increase the percentage of GDP spent on R&D.

This relief is not just for profit making companies, there is a benefit to all companies that are undertaking relevant activities. 

What is the benefit of claiming?

There are two schemes available, the SME Scheme and RDEC for larger companies. For the purpose of the SME Scheme an SME is considered to have fewer than 500 staff and either not more than €100m turnover or €86m in gross assets. If the company is part of a group structure it will be the whole group that will need to meet this requirement.

The benefit for an SME can be between 19% and 33% of the qualifying R&D expenditure, depending on whether the company is profit or loss making. For expenditure incurred on or after 1 April 2023 the benefit range changes to between 19% and 22%.

For larger companies claiming RDEC, the benefit is 13% of qualifying expenditure, rising to 20% for expenditure incurred on or after 1 April 2023.

What is qualifying expenditure? 

The costs that can be claimed for in projects where there is qualifying R&D activity are:

  • Staff costs – including salaries, employers’ NIC, pension contributions and reimbursed expenses.
  • Subcontractor costs – up to 65% of the total cost for SMEs. For RDEC claims only qualifying bodies such as universities and technical bodies can be claimed for.
  • Externally provided workers – temporary workers provided by an external company. 
  • Consumable materials – materials and consumables including heat, light and power that are used during the R&D process.
  • Software – software licences needed to deliver the R&D project.

But, most importantly, what is R&D for the purposes of R&D tax relief?

For a project to be considered to be undertaking R&D it must satisfy two basic criteria:

  1. The project should seek to achieve a technological or scientific advance. An eligible project should add to the technical or scientific knowledge already available in the sector.
  2. The project should seek to overcome a technological or scientific uncertainty. In an eligible project it is not known at the outset if a solution is either possible or how to deliver it and the information should not be readily available or deducible by a competent professional. However, even if someone else in the industry has already achieved the same objective, you can still potentially claim if the solution is not in the public domain and not obvious.

In construction, every project presents its own, unique set of challenges – and with them, the opportunity to innovate. New products, materials, processes and approaches can all count toward an R&D tax credits claim. Some activities that have qualified for R&D tax relief include:

  • the use of non-standard or new building materials
  • managing challenging ground conditions through innovation, such as issues with piling or foundations, perhaps requiring dealing with unidentified contamination
  • coming up with new ways to implement energy saving techniques
  • integrating new technology into buildings
  • solving technical problems that arise during or after construction.

How to make a claim?

R&D tax relief claims are made to HMRC through your Corporation Tax submission (CT600). 

However, we would recommend speaking to a professional R&D tax specialist to assist with any claim as the detail above is only the headlines of the scheme and there are many variables within each area. 

Even if you are not certain whether you fully meet the criteria, we would always recommend checking; we want to see the construction sector getting the benefit it should. If you do qualify, you can claim for two years, so you have not missed out on important tax savings.

Would you like more information on R&D tax credits? 

If you would like further information on whether you qualify for R&D tax relief, please contact our expert listed below and visit our Tax-efficient R&D service page.

Got a question? Get in touch.