Research and development (R&D) tax credits are historically under claimed in the construction industry. However, they can have a huge financial benefit to your company if claimed correctly.
Our experts answer the key questions of those within the property and construction industry to help them determine what benefits are on offer.
What cash benefit does making an R&D claim generate?
SMEs can enhance their qualifying expenditure by 130% (a total deduction of 230%). For profitable companies, the relief effectively reduces the net cost of spending to 56p for every £1 spent on R&D activities (based on the current corporation tax rate of 19%). Alternatively the relief can give rise to cash repayments of up to 33.3% of the cost for expenditure incurred from 1 April 2015, even where no tax has ever been paid.
An R&D example
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. The uncertainty of the materials in the cladding system and the technological uncertainties surrounding fixing were qualifying R&D projects.
This process cost the company £10,000 to research, and then test, the process. Using R&D tax credits the company could reduce the tax liability by £4,370 (based on 19% corporation tax rate), or if loss making, the company could obtain a cash repayment of £3,333.
Until April 2016 large companies’ relief involved allowing the company an enhanced deduction when calculating its taxable profits of 30% (a total deduction of 130%). From 1 April 2016, the rules changed so that large companies are only allowed to claim a tax credit back from HMRC (at a lower rate than for SMEs – up to 8.8% of the expenditure).
What is R&D?
R&D is defined as seeking advances in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones. The relief is not just for ‘white coat’ scientific research, but also applies to all innovation to solve a unique problem.
Do we carry out R&D?
Many companies overlook R&D relief as they are not aware that they are undertaking R&D, particularly if they are not involved in the technology sector. However, we would recommend that all companies should consider carrying out a review of activities, to ensure this valuable tax relief is not lost.
Listed below are just some of the types of activities which could qualify:
- Development or adaptation of tools and materials to improve efficiency, or to adapt construction techniques to adapt to environmental or land conditions (such as construction to withstand weather conditions).
- Identification of technological improvements in the construction process or to the products and software used. This can include developing, testing and implementing systems which are technically difficult.
- Research and design, development of prototypes, commissioning, including quality testing and production of the final product/ building.
- Development of environmentally friendly methods, or sustainable technology.
- Development of sophisticated systems to meet health and safety requirements. For example, innovative scaffolding, safe working processes and automation.
- Modern Methods of Construction (MMC) and Building Information modelling (BIM).
Will making a claim be time consuming?
Making a claim can be a complex and lengthy process. However, this analysis can be outsourced with little impact on your business. This will allow you to focus on running your business but still ensure you are taking full advantage of this government backed scheme.
Working in partnership with construction industry advisers we are able to take the time consuming research and complex aspects of making the claim away from you. However, for companies who have made an R&D claim before, or who are able to conduct their own research, we are happy to analyse any potential claim and provide specialist advice on a case by case basis.
Do I apply as a SME or a large company?
Your company is an SME for R&D tax relief purposes if:
- staff headcount is less than 500; and, either:
- turnover does not exceed €100m; or
- balance sheet total does not exceed €86m.
If a company is part of a group, the thresholds for the above will be based on the total group staff, turnover and balance sheet values.
Is there a time limit to make claims?
Yes - If your company has been undertaking qualifying R&D and has not yet claimed R&D relief, you may make a backdated claim—two years after the end of the accounting period.
If a company’s accounting period end is 31 December 2015, and the company has already submitted the tax return by the normal filing deadline of 31 December 2016, the company will still have until 31 December 2017 to amend the tax computation and submit the R&D claim to HMRC.
How do I make a claim?
Claims are made through your company’s corporation tax return, before being reviewed by a specialist unit within HMRC. To provide evidence alongside the computation, a report is submitted outlining: the scientific or technological advance sought, the scientific or technological uncertainties overcome, why the advances were not readily deductible by competent professionals and details of qualifying expenditure.
When would I see the benefit of making the claim?
The timing of the benefit of making an R&D claim will depend on when the claim is made, and if the company is profitable or loss making. Generally it can be either offset against a company’s tax liability or as a cash benefit at a later date.
If the company is profitable and makes a claim on the tax computation (e.g. 31 December 2015) and submits the claim within the normal filing deadline (i.e. by 31 December 2016), the R&D tax relief will be a reduction of the company’s tax liability. This will be an immediate benefit as the company will pay less tax to HMRC on the normal tax payment due date (but will still be subject to HMRC agreement).
If the company is profitable and makes a claim on the tax computation (say 31 December 2015) but submits an amended claim after the normal filing deadline but within the amended filing deadline (i.e. by 31 December 2017), the R&D tax relief will be a reduction of the company’s tax liability, however on the basis the company previously paid tax based on the taxable profits before the R&D claim, the reduction of taxable profits will generate a repayment of tax previously paid to HMRC. The company could take up to 6 weeks to receive repayments once the claim has been submitted to HMRC (subject to any further enquiries HMRC may have).
If the company is loss making (and therefore is surrendering losses to obtain a cash repayment from HMRC), HMRC could take up to 6 weeks to process the claims (subject to any further enquiries they may have).
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.