R&D Tax Relief for Construction Sector

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This week I have had multiple queries from companies within the construction industry. Much more than usual. 

Obviously the effects of Coronavirus are having an impact on companies. As construction companies are known to have cash flow problems, the current situation is making things worse for them.

I delved into the HMRC statistics and it showed that only 4% of R&D claims are from the construction sector. The UK has more than 900,000 construction companies and only 2,028 claimed R&D tax relief.

I believe that the sector is massively underclaiming so this video will help you identify any clients you have that may qualify for R&D tax credits.

Introduction

We have had a few queries from companies within the construction sector asking whether they qualify for R&D tax relief. So this episode we will help identify whether any of your clients qualify. 

If you want to learn and know more, stick around and let’s go!

Welcome to the R&D Tax Show, where we help accountants, tax advisers and their clients claim R&D tax relief. We help companies claim R&D tax relief. 

In this episode, as mentioned, we will talk about the construction sector regarding R&D tax relief. 

We will start with an introduction, going through the R&D tax definition and how it applies to the construction sector and provide examples of sectors within the construction industry that qualify for R&D tax relief, such as property development, architects and civil engineering firms. 

With the latest statistics given by HMRC, only 2,000 construction companies claimed R&D tax relief out of 48,000. That is approximately 4%. To add depth to that information, there’s just over 900,000 construction companies in the UK. 

We expected more than 2,000 construction companies to qualify and think a large number of companies are missing out. 

Many construction companies believe that they do not qualify for R&D as it only includes groundbreaking innovation. This is however not the case. 

We have a previous episode breaking down the definition of R&D tax relief so make sure you check out that episode as well. Within this episode we will summarise the definition again and relate the summary to the construction sector. 

R&D Definition

The first part of the definition is, there has to be an advance in science and technology. 

The advance does not have to be groundbreaking or revolutionary. 

The definition includes appreciable improvements to something. These appreciable improvements can be tangible. For example, making something stronger or faster. It could be making a building more stable. 

In addition, it could be an intangible improvement as well. As an example, a new process that actually leads to cost savings. 

The advance also includes trade secrets, so if Company A creates a modular building and then Company B creates the modular building, Company A may not share how they have created the modular building. There may be technical uncertainties involved, which they have not shared in the open market so Company B does not know what they will encounter, when they encounter them and how they will overcome them. In this case Company B will still meet the first part of the definition. 

Failed projects also meet this part of the definition, due to the project seeking an advance in science and technology. 

The second part of the definition is the project has to have technological and scientific uncertainties. An uncertainty is knowing whether something is actually possible to do. 

To simplify this, if a project starts at A and wants to end up at Z, does the company know the route of development to get from A to Z? If no, then there are uncertainties.

The third part of the definition is the project not readily deductible by a competent professional. 

This means that people undertaking the project must be competent in the work they are doing and must find it difficult to do. 

What HMRC look at with this aspect is how long the project takes. If a project was completed within a short period of time this tends to show HMRC that the project was not difficult to do. The longer it takes generally, the more difficult it potentially is. 

Before going into the examples of R&D projects within the construction industry, it is difficult to provide every example of qualifying projects. This is why we believe that it is important to understand the definition of R&D tax. 

Property Developers

  • removing contaminants from the land before building
  • developing a new drainage system that is able to take waste away from the property into the drainage system. 
  • One specific example we have is a company is building a block of flats and they could not get the road to close due to it being so busy. This meant that they could not receive materials used to create sound deadening to fit between each row of flats. This resulted in the company using a new method of creating a sound barrier between each flat. 
  • Not having the correct space methodology to move materials and items which then lead a company to different methods of creating workaround will qualify. 
  • Off site development processes such modular buildings. 

Architects

Before the properties have started development, the architects have to first create a plan of how the property is going to look. Within that planning they may encounter some technological uncertainties. 

As an example, the environment the property is being built in may be unsuitable for a standardised building design so the architects may use different materials to create the building or using different processes. 

By using different materials or processes, that creates systematic uncertainties that we have mentioned before. 

Let’s say the owner of the building wants to create a property that is completely sustainable using nothing but green energy. This would clearly have its own challenges that the architects will have to figure these out. 

On the other hand, a building could already exist and can not be knocked down and they need to figure out how to build around it with consideration of the existing building being frail and unstable. 

Software Development

We have mentioned the construction aspect however software developed to help design or construct the building may also qualify. 

Examples are a company creating:

  • management software tool to help manage their projects.
  • 3D rendering software to help understand the properties of the building from a structural perspective.
  • 3D printing software can help build prototypes so the company can identify what works well and what does not work well so they can further improve on their design. 

Civil Engineering

An example of a qualifying R&D project for civil engineering firms could involve the development of a bridge. 

There are clear methods already existing to create a bridge, however if the engineers had a lack of space or the environment is unsustainable to build a bridge on, the engineers have to create novel ways of developing the bridge. 

We have a client who developed an anti-flooding system in a major town, using the existing environment and without disruption to the town centre. To minimise the disruption, the

engineers had to create a new method of creating the system. This new method qualified for R&D tax relief. 

If there is a listed building, the engineers can not make changes to the listed building. So they have to figure out how they can develop around or through the listed building to create an improved building. 

Within construction, limitations with space and accessibility can potentially help a project qualify for R&D tax relief. 

We hope this information was useful for you. If you have any questions please get in touch.

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Tehsin Khan

Tehsin Khan

Tehsin is an experienced tax professional with 12 years of experience helping companies and individuals save money. He has worked for the most reputable tax firms in the country before setting up GrowthPad. In his spare time, Tehsin contributes to national tax publications and plays the odd game of football.

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