How to get credit where it's due for R&D
Construction companies could save themselves millions of pounds through the R&D tax credit scheme - if only they knew how the system worked. Garry Hague explains.
What is the R&D tax credit scheme?
The research and development (R&D) tax credit scheme was introduced by the government in 2000 for SMEs and in 2002 for large companies. The SME scheme is for limited companies with fewer than 500 employees, and either annual sales no greater than €100m (£79m) or a gross balance sheet not exceeding €86m (£68m). Companies that fall outside these criteria are classified as “large” companies.
The scheme enables UK limited companies to gain tax relief for R&D work which can either reduce their tax bill or provide a cash sum. It aims to encourage greater spending on R&D work to promote innovation and improve competitiveness.
Why may construction firms be unaware of the scheme?
Many firms that successfully apply for tax credits through the scheme are carrying out practical work; it is not just about people in white coats working in laboratories. Construction companies are overcoming technical challenges on a day-to-day basis, and much of this work may qualify for R&D tax credits.
How much can be claimed?
There is no limit on what can be claimed, providing that the claims are in line with HMRC requirements and the associated Department for Business, Innovation and Skills (BIS) guidelines. According to the latest HMRC statistics, for 2013/14, £1.75bn of support was claimed under the scheme. However, the construction sector represented only around 2% of claims made.
The bulk of the claims made for R&D tax credits are under the SME scheme where companies can benefit from, on average, a £50,000 reduction in their corporation tax with a cash credit. The scheme is retrospective, allowing claims to be made for work undertaken over the prior two years.
The categories of expenditure which qualify for relief include: payroll costs for staff involved in R&D work; subcontract and consultancy costs; materials costs; and utility costs.
How does the application process work?
The company needs to submit a claim to HMRC which includes an analysis of its R&D costs in line with HMRC requirements and the associated BIS guidelines, along with supporting tax computations and a tax return. This should be supported by a technical report which details the R&D work undertaken and how it meets the criteria and requirements of the scheme.
The claim should include details of:
- What exactly has been developed;
- What were the technical uncertainties and what was the advance made in technology or science;
- Who was involved and what their contribution was;
- Eligible costs;
- The tax value of the claim.
What construction activities are covered by the scheme?
Companies that are improving, adapting or developing products or processes, and are tackling “technological uncertainty”, are likely to qualify. Subcontract and consultancy services related to advancing the state of knowledge or technology, where there is technical uncertainty, are also likely to qualify.
Construction-related activities that may qualify include:
- Development of new construction methods;
- Advances in design and engineering;
- Use of new or unique materials;
- Development of sustainable, energy efficient and low-carbon technologies;
- Advances in the investigation and treatment of contamination and reclamation of land;
- Ground engineering techniques to allow construction in sensitive areas or overcome unusual ground conditions;
- Technical research, testing and feasibility studies;
- IT and software developments;
- Process development, including business systems development.
Is there any restriction on how funds claimed are spent?
No. Construction companies which have successfully qualified for tax refunds through the scheme often invest in further R&D activity, though the funds can be channelled into any area of the business.
Garry Hague is a director at R and D Tax Specialists