Construction firms missing out on billions in unclaimed R&D tax credits
Construction companies are missing out on billions of pounds a year in research and development (R&D) tax credits by failing to claim for their full entitlements. This is due to many construction firms being unaware that their existing activities are well within the scope of the tax relief available. Our research shows that construction firms claimed just £20 million in R&D tax credits in 2013/14* – just 0.001% of the sector’s £205 billion total turnover in that year.
We have found that construction companies can claim R&D tax credits worth around 2% of their turnover when they are aware of the full range of qualifying activity. This means that in total the industry should be claiming around £4.1 billion.
SMEs can claim tax relief between 26% and 33% of the qualifying costs of research and development against corporation tax bills. Large companies with over 500 employees can claim 10% of qualifying spend.
There is currently no limit on the amount of qualifying costs on which R&D tax relief can be claimed.
Construction firms can claim R&D tax credits if they are implementing new techniques and systems which they have not used before if they improve their processes or upskill their workers.
This is the case even if they cannot claim to be the first to do so in the industry. For example:
• Construction companies are under more pressure than ever before. They are being asked to apply value engineering to outperform traditional construction techniques for aspects such as robustness, sustainability, durability, fire resistance, thermal performance, sound insulation, noise and acoustics/ wind reduction, green, carbon and energy efficiencies.
• Firms converting buildings to a new use, such as office to residential, demolishing existing structures or involved in dealing with complicated civil engineering such as ground works could claim if it is the first time they have done that type of work.
• Residential developers can also claim for innovations such as affordable or renewable materials or eco-housing and affordable housing designs.
• Working with listed buildings (particularly new with old) or where you have to operate with a number of constraints.
• Working to find solutions to overcome technical issues such as restrictions to site access or where minimal disruption to surrounding services such as train stations, airports, hospitals or schools.
• Complex or novel designs at the planning stage
We advise that R&D tax breaks should be factored in to project costings at the outset. In an industry where margins are tight, knowing that your company can claim back a proportion of its costs could make the profit margins more attractive and even make the difference between it being viable or not.
Paul Fenner, Head of Real Estate & Construction at Moore Stephens LLP says, “Construction companies should be making full use of R&D tax credits that are there to help them. They are doing themselves a major disservice by only claiming such a small fraction of the R&D tax breaks that they are entitled to.”
“R&D tax credits can cover a far wider variety of activities than many companies think. Research and development is not just something that’s done by men in white coats in a lab or even an office – it can happen on-site and frequently does, particularly at the design stages of a project.”
“R&D is really about technical problem solving and let’s face it, what company does not face problems that they have to solve on a daily basis.”
“There’s a huge amount of innovation going on in the construction industry on large and smaller projects alike, but it’s not always seen as R&D. Often it’s the unsung innovation that companies are overlooking.”
Paul Fenner explains, “Many companies don’t realise that they don’t have to re-invent the wheel in order to qualify for R&D relief. As long as it’s innovative to them, and their business processes and skills levels are being benefitted by the new approach, they can count it as R&D.”
“Construction is a sector fraught with challenges, as new and unforeseen operational issues can arise throughout the life of a project. This is becoming even more apparent as architectural designs become increasingly cutting edge, or as more builds require complex sub-surface work.”
“Finding solutions to these problems is not just good for business by helping companies learn lessons and delivering valuable process improvements – firms should be aware that it can also incur tax benefits.”