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For many companies Research & Development (R&D) tax relief has long been a valuable incentive for those investing in innovation. Encouraging businesses to push boundaries, develop new technologies and enhance products or processes by offering significant tax savings.
Several key changes took effect from 1 April 2024, introduced with the government’s goals of tax simplification and reducing fraud.
Tyler Hursey, Tax Adviser, shares what this means specifically for the construction sector, and the new opportunities and important considerations these changes offer when claiming R&D tax relief.
R&D Tax Relief – Key 2024 Changes
For accounting periods commencing on or after 1 April 2024, a new merged scheme now applies to all companies, other than those loss-making R&D intensive SME’s who will continue to use the existing SME scheme.
Under this new merged scheme, companies claim relief by way of a taxable ‘above-the-line’ tax credit, equal to 20% of the qualifying expenditure based on the current RDEC Research & Development Expenditure Credit (RDEC) scheme.
A notable change here though is that all companies are now able to claim R&D tax relief on work subcontracted out. However, large companies will no longer able to claim the R&D tax relief if the work has been subcontracted to them, to align with the SME rules.
Additionally, qualifying expenditure must generally be incurred within the UK, except where there are:
- Material factors such as geography, environment, population, or other conditions that are not present in the UK and are required for the research.
- Regulatory or other legal requirements that activities must take place outside of the UK.
Administrative Changes to construction R&D
From August 2023, all R&D tax relief claims had to be submitted with an Additional Information Form. This form provides HMRC with information regarding the costs being claimed as well as the R&D activities being undertaken.
Additionally, companies who have not made a claim for R&D tax relief in the previous 3 years must now submit an advanced notification form to HMRC within 6 months of the end of the company’s accounting period.
Innovation in the Construction Sector
For the construction sector, these changes could be both advantageous and challenging.
Businesses acting as both main contractors and developers may benefit, as they can now claim for their subcontractors’ activities. Whereas specialist firms working under subcontracting arrangements will now face limitations.
Companies will also need to be mindful of the PAYE/NIC cap and the employment arrangements of businesses in the construction sector. Where the trade and employees often exist in separate entities, this may prevent companies from realising relief when in a loss-making position.
What qualifies for R&D in construction?
While it can be challenging to make R&D claims within the construction sector – the industry is traditionally seen as less innovative compared to sectors like technology – construction companies can still benefit significantly from R&D tax relief.
It’s important to note that for R&D activities to qualify, the products and processes developed must achieve an advance in science or technology, and not simply be new to your company.
Some of the most common R&D projects we come across within the construction sector are as follows:
- Use of new and eco-friendly materials and processes
- Innovative building methods and overcoming design and engineering uncertainties.
But there are some common areas of qualifying R&D which are often overlooked such as
- Unsuccessful and internal projects
- Expenditure where there isn’t a new product – R&D can be related to changes or modifications of an existing product or process.
How to make a Qualifying Claim for R & D in construction
Acquainting yourself with the R&D criteria relating to your company will help you to make a compliant qualifying claim. Along with a trustworthy agent who can guide you through the process, and importantly be there for support should HMRC select your claim for detailed scrutiny.
At Scrutton Bland, we have a dedicated team here to support you with both identifying projects eligible for R&D, and in guiding you through the process of making a claim. To get in touch please call Tyler on 0330 058 6559 or emailing hello@scruttonbland.co.uk
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