The latest figures from HMRC show that the amount of tax relief claimed by UK companies for research and development expenditure has tripled in the last 10 years to £1.2bn. But there is evidence that these tax incentives remain under-claimed – particularly in the construction sector, says Howard Freedman.
In the year ending 2012, R&D credits for the construction sector totalled just £15m, little more than 1% of the total R&D relief provided to UK firms. The manufacturing sector, by contrast, claimed £395m.
How can we explain the low take-up of R&D tax credits in the construction sector? It may be partly down to a misunderstanding as to what constitutes research and development activity.
While you might reasonably expect to find R&D tax relief claims in some obvious sectors like pharmaceuticals, chemicals or life sciences, the scope for claiming this type of relief is not just limited to those in white coats.
Many construction companies may not think that they “do” R&D – and consequently don’t appreciate the extent to which their expenditure might qualify.
R&D is usually present in the development of new and improved products, a bespoke piece of work, or in new and improved processes, and the eligible costs are often much higher than initially expected. When submitting a claim, it is also possible to take into account the overheads relating to R&D activities, such as heating, lighting and IT costs.
Baker Tilly recently carried out a review of the R&D activities of a specialist building services subcontractor. As a result of this review, the firm was able to double its claims for R&D tax relief, significantly reducing its corporate tax liability.
Other examples of qualifying expenditure might include investment in the development of new materials and tools, or in process improvements or new software.
At a Baker Tilly event held last year, we conducted some audience research among representatives of the 23 business sectors that were present. Of these 23, we identified R&D activity in 22 of them, and many had never considered that their activities were eligible.
R&D tax credits were first introduced in 2000 as a means of encouraging greater R&D spending and innovation. Since then, the available tax incentives have become more generous and HMRC has expanded the way it interprets and applies the rules to provide greater stimulus for innovation in the economy.
The tax savings on offer for companies that invest in R&D are generous. The R&D tax relief scheme provides an incentive for qualifying expenditure by both SMEs (225% relief) and large companies (130% relief). Based on the tax rates for the year ending 31 March 2014, this means that for SMEs, can save up to 54p in corporation tax for every £1 spent on R&D that is identified. For large companies every £1 spent can save up to 30p.
Loss-making SMEs can also cash in their losses for a tax refund equivalent to approximately 25% of their qualifying R&D spend.
Since 1 April 2013, large companies have also been able to opt into a new “above the line” (ATL) credit regime which runs alongside the existing large company R&D tax credit regime. This delivers a marginally better tax saving than under the existing scheme, and for the first time permits large companies to cash in their losses for a cash refund, subject to certain conditions.
For loss-making companies struggling with cashflow difficulties, an R&D tax refund can provide a much-needed lifeline.
SMEs should also note that the usual limits for determining whether a business is an SME are in fact doubled for these purposes of calculating eligibility for tax credits. Because of this, larger SMEs have a particularly strong incentive to make use of the scheme.
Construction firms would therefore do well to reconsider their activities and examine their eligibility for this type of relief.
Our advice is clear: challenge pre-conceptions, don’t assume that your business is not “doing” R&D, or that the value of your R&D expenditure is too low to warrant a claim. You have nothing to lose, and potentially much to gain.
Howard Freedman is head of real estate and construction at accountancy firm Baker Tilly. He can be contacted on [email protected] or 020 3201 8000
