Gareth Randle is a Senior Industry Specialist at ForrestBrown
There is no doubt that the UK construction sector is crucial to driving the country’s economic growth. As the recently published construction book shows, the industry supports more than two million jobs in the UK and is expected to win £31 billion in contracts on economic and social infrastructure projects over the next year . This is partly driven by the government’s ambition to build greener as part of its plan to achieve net zero targets by 2050.
“Incentives such as R&D tax relief can play a vital role, ensuring they can continue to innovate”
However, with increasing cost pressures exacerbated by rising inflation, construction companies must also strengthen their cash flows alongside their focus on developing more sustainable methods of building homes, transport links and other infrastructures. Rising labor costs and supply chain disruption are already affecting the profitability of many companies in the sector. For these companies, incentives such as R&D tax relief can play a vital role, ensuring that they can continue to innovate in difficult market conditions.
However, there are still challenges that the industry must overcome to harness the full power of this key component of the innovation toolkit. If construction companies are to continue to innovate as part of the government’s ambition to build greener, this will need to be addressed.
Uncertainty is a brake on innovation
One of the key hurdles to overcome is establishing clarity about who ‘owns’ the R&D that takes place within construction supply chains that often involve multiple contractors and subcontractors.
In these cases, determining which entity should claim the relief – and at what expense – can be a complex task, with the potential to dissuade companies from making use of the incentive. HMRC has not acted to resolve the uncertainty arising from its position on this issue, despite a court ruling that described its interpretation as “completely out of step” with the commercial reality facing construction companies.
None of this means that construction companies should be delayed in claiming R&D tax credits. However, it is imperative that those who do are aware of the issues and seek advice on proactive steps they can take to protect themselves in the event of an HMRC enquiry.
Rate changes and greater compliance
HMRC’s plans to combine its Research and Development Expenditure Incentive (RDEC) and SME Incentives into a single scheme could also pose challenges, particularly if this blocks the existing lower rate for smaller businesses where cash flow problems may be more severe.
While the rebalancing of rates between the two schemes in favor of the RDEC could be seen as a boon to large companies, the net benefits may be offset by the strains placed on SMEs in their supply chain by the reduced access to R&D tax relief financing.
This rebalancing was partly driven by a desire to tackle abuse of the SME scheme, where most errors and fraud are believed to occur. The rate changes have been accompanied by an increased focus on compliance, with HMRC allocating more resources to enable it to open more inquiries into R&D tax relief applications. While eradicating abuse is essential, this two-pronged approach carries the risk that some companies who claim to legitimately become collateral damage through a reduction in profits received or be sued due to the noise of negative fund on R&D tax incentives.
Changes to the R&D “rules law”.
The government’s construction handbook is a positive step towards modernizing the construction sector and encouraging businesses to focus on much-needed innovation. R&D tax relief plays a key role in helping the sector achieve this goal, but construction companies need to approach the incentive with their eyes wide open.
This means keeping up to date with the latest changes to the R&D ‘rulebook’ (such as the additional information HMRC will require before all claims made from 1 August this year) and ensuring – that the methodology and documentation are suitable for their purpose in the climate of increase. compliance activity.
Businesses in the sector should continue to explore R&D tax relief for projects they intend to innovate on, but must rely on preparing their claim, keeping records and preparing clear technical justifications to demonstrate the uncertainties they are addressing the projects
