Over the last few years, there has been a significant drive to increase efficiency and innovation in the UK’s construction sector.
In the 2020 Budget in March, the Chancellor promised to “get Britain Building”. This coupled with the delayed publication of the UK’s National Infrastructure Strategy, with off-site construction anticipated to play a large part in that, means the use of digital technologies and innovative approaches to infrastructure delivery will be a key focus for the industry.
With this planned increase in investment and activity, there is a need to consider new ways of working, with a focus on MMC and design for manufacture and assembly (DFMA).
This focus on innovation, new processes and approaches, brings with it an opportunity for companies to claim tax relief on any research and development (R&D) costs they incur. This is a valuable relief and can provide additional return and cash flow benefits.
R&D, for tax purposes, takes place when a project seeks to achieve an advance in science or technology. In meeting this definition, you should consider whether your advancement extends the overall knowledge or capability in the field of science or technology and not just the company’s own state of knowledge. The project must also involve an uncertainty that competent professionals can’t readily resolve and where solutions aren’t common knowledge.
Within the construction sector, R&D may relate to specific site or building issues or may be wider improvements on standard construction methods. Some typical examples within the sector include:
- The use of new materials;
- Developing new methods of construction and assembly;
- Use of new energy saving techniques or incorporation of green technology into builds;
- Improvements in sound and thermal insulation;
- Integrating technology solutions into builds;
- Development of new digital technology for construction;
- Resolution of difficulties around complex site issues;
- Development of safety equipment;
- Creating efficiencies around off-site fabrication; and
- Development of flood resilience around problem sites.
Tax relief for SMEs
Tax relief on eligible R&D expenditure for SMEs is currently 230%. In practical terms, for each £10,000 of eligible expenditure, an SME can claim a corporation tax deduction of £23,000.
For loss-making SMEs, a cash repayment is available. This repayment is currently equal to 14.5% of the loss arising from the R&D tax deduction (ie up to 33.35% of the actual R&D expenditure).
The above relief is only available to companies and it is necessary for the company to be a going concern.
Tax relief for large companies
Large companies (ie those which are not SMEs) can also claim tax relief on qualifying R&D expenditure. However, relief is available under a different regime – the R&D Expenditure Credit (RDEC). Unlike the SME scheme, RDEC is usually accounted for ‘above the line’ (ie as part of EBITDA) for accounting purposes. This may impact cost-based contracts, staff bonuses, the reported tax rate and other financial ratios. The impact of accounting for the RDEC should therefore be explored before a claim is made.
Under RDEC, a company can claim a 13% tax credit (12% for R&D expenditure incurred before 1 April 2020) on R&D spend, providing it is a going concern. The RDEC is itself taxable and so there is an effective tax saving of up to 10.5% of the qualifying expenditure (9.7% before April 2020). A feature of RDEC is that the credit can also be claimed as a cash repayment.
However, there are detailed offset provisions against corporation tax and other taxes, before the credit can be converted into a cash payment.
The main costs which are eligible for R&D relief are:
- The costs of employing staff who are actively engaged in carrying out the R&D itself.
- Materials that are used directly in carrying out the R&D and are consumed or transformed in that process. Expenditure incurred on items which are later sold or transferred as part of the company’s ordinary business cannot be included.
- Power, water and fuel costs used directly in carrying out the R&D, but not other costs such as telecommunications, rent and data costs.
- Computer software used directly in the R&D.
- Sub-contracted R&D expenditure, usually when an SME sub-contracts certain activities within the R&D project. Under the SME scheme, eligible expenditure is usually restricted to 65% of the payment to the sub-contractor, unless the subcontractor is connected. Large companies can claim subcontractor costs in full but only in limited situations.
- Expenditure on externally provided workers (ie those workers who are not employees of the company, but are instead paid through an intermediary, such as an agency, to directly and actively be engaged in a company’s R&D). Usually these costs are restricted to 65% of the staff provision payment.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.