Why construction and civil engineering businesses are potentially missing out on an average of £70,000 in R&D tax credit savings
Experts provide insight for how companies in the construction sector can utilise R&D tax credits and be rewarded for their innovation
Are civil engineering businesses in the UK missing out on R&D tax credits? With HMRC data revealing that the UK construction sector made up just under 6% of UK R&D tax credit claims, those operating in the industry are encouraged to consider whether they might be eligible.
For those that did make a claim from the sector as a whole, the average value of a claim was just over £70,000 in 2018-19.
What is an R&D tax credit for civil engineering?
SMEs and large companies in the UK can claim tax relief for a broad range of R&D activities, as part of schemes which are administered by HMRC. Typically, a business making a successful claim can get back up to 33% of the amount that they have spent on qualifying R&D.
Many people have a misconception of R&D as only suiting people who work in white lab coats, but the truth is that the term can be applied to any business that has done something innovative in the way it operates, or developed new ways of doing things. HMRC defines innovation as overcoming an uncertainty – something that could not easily be worked out by someone who is a professional in the field. And even if the innovation fails, it could still be eligible for tax savings.
There are five broad cost categories which can be included in a civil engineering R&D claim; staff costs, subcontractors, externally provided works (EPWs), software and consumables like heat, light and power.
Dominic Bartholdi, Head of Business Development at R&D tax specialists GovGrant, provides expert insight into R&D in the civil engineering profession:
Why the civil engineering and wider construction sector could be missing out on savings
We find that companies from all sectors have the potential to claim UK R&D tax relief. For tax purposes the definition of R&D is so much broader than you may think.
It is generally considered that there is little advancement in building houses or excavating groundworks as it is the kind of activity we’ve been doing in some form for thousands of years. However, there are exceptions and these are the areas where clients need to focus.
What qualifies as R&D in the construction sector?
We see qualifying R&D activity in the innovative use of green or sustainable materials and methods. R&D often leads to an improvement in existing construction techniques to solve site-specific or environmental issues or developing new products such as lighter weight, stronger, more resilient or easier-to-process building materials.
It can be tricky to identify compliant activities in the civil engineering and construction sector but we know that firms of all kinds are now benefiting from refinement through technology. R&D tax claims can come from process improvements, production improvement and scalability and quality control. And we see this happening in all aspects of construction, including:
Adaptations like modular buildings and removable walls
Modifying or developing new materials which require or meet new specifications and tolerances
Developing new materials or techniques that are more sustainable and better for the environment, for example new insulation materials or application methods.
Developing new or improving existing machinery
Attempting to overcome unprecedented land or extreme environmental conditions
Achieving new fire and building regulations within specific constraints e.g. of machine access, historic listing restrictions or budget and time
Even when businesses are already claiming R&D tax credits, they might not have fully explored the potential of that claim.
What are the triggers that could suggest that a construction firm may have R&D that qualifies for a tax credit claim?
Knowing what is compliant R&D activity and what isn’t often comes down to level of uncertainty. It could be that a firm is doing clever and complex calculations – but being clever and skilled isn’t always the same as problem-solving to counter uncertainty. Take the example of an engineer who is using tolerances, stresses and tables to specify a project. Squaring the circle may be tricky, but if you are relying on existing knowledge in tables and standards then this doesn’t sound like R&D.
If, however, you are creating new standards and tolerances – because of a new material, a new piece of equipment or a brand new client requirement, then this suggests that this could be qualifying R&D.This can show itself in simulations, specific and iterative CAD modelling, designing prototypes, plugging in and working with new variables. This is very much the foundation of R&D. Also a failed project can be a sign that you’re tackling new ground.
What advice would GovGrant give to construction firms who are unsure whether they should apply?
Our one and only goal is to get you the maximum benefit you are entitled to for innovating. Initially we will assess the viability from a financial point of view to make sure it’s worthwhile making a claim, by reviewing your management accounts and tax computations. We don’t want to waste your time so we’ll give you realistic feedback from the start.
If there is a good chance of making a claim, we then arrange a meeting with each relevant department or site. This is when our specialists identify what qualifying R&D activity has taken place. We never ask the question ‘Tell me about your R&D?’ We have a detailed conversation to understand your whole business and the projects you are undertaking.
When you meet your dedicated specialist, it will feel like you’re talking to a colleague rather than your advisor.
Once a qualifying project is identified what next?
Once a project is deemed to be qualifying R&D activity then the next step of the process is to identify what qualifying costs were incurred whilst carrying out the activity – so which staff, third party, and infrastructure costs can be claimed. Again, this might not be something that clients are aware of.