The Government wants to give you money but you are not claiming it!
“A lot has happened since your last blog” (Andrew Davies said to me in passing, which I took less as a general “how are you doing” type conversation and more “you need to write a blog this week” instruction). So here we are.
You will be pleased to know that Scottish case law does not feature in this blog as it has in most of my previous blogs. Scotland does, of course, feature. I cannot fail to mention our wonderful Calcutta Cup win, nor can I fail to note that the view below us in the final Six Nations table looks wonderful. Congratulations to Ireland, clearly the stand out team, and all our clients with Irish roots and employees. They had one heck of a week two weeks ago, with domination at Cheltenham and the Grand Slam on St Patrick’s Day at Twickenham. If Guinness did weeks …
During that week Fenwick Elliott hosted, together with Smith & Williamson (a financial, tax advisory and professional services firm), what will be the first in a series of “sporting legends” dinners. We were privileged to have former British & Irish Lions players Rob Henderson (ex-Ireland) and Craig Chalmers (ex-Scotland) join us for an evening of fine food, wine and great chat. Both Rob and Craig were hugely entertaining with great stories from their fantastic careers (on and off the pitch!).
Smith & Williamson were an important part of the evening as, although the evening was relaxed, we wanted our clients and contacts to have the opportunity to find out more about a certain type of tax relief that the Government actively wants to give (yes, you read that correctly). That relief is Research and Development or R&D relief and it can be applied to constructions companies.
What is R&D tax relief?
Simply put, it is an incentive to encourage companies in the United Kingdom (not just in construction) to invest in new and innovative products, working methodologies, and in finding solutions to problems. HMRC defines eligible R&D as “activity that attempts to solve a problem through technological or scientific advancement”.
I confess that when Smith & Williamson initially raised this topic with me, the first question in my head was just how many specialist clients we had that created the type of innovations that might qualify for R&D tax relief. Ne sleight on our clients; it was a complete misunderstanding on my part of what work can qualify for R&D tax relief. As discussed below, it appears that many in the construction industry are not fully aware of how this relief can benefit them either.
" The HMRC test may sound like quite a high bar; it isn't. It isn't easy, as it is not always obvious what R&D is, and submitting a compliant claim that maximises the relief that may be obtained requires specialist assistance. "
The HMRC test may sound like quite a high bar; it isn’t. It isn’t easy, as it is not always obvious what R&D is, and submitting a compliant claim that maximises the relief that may be obtained requires specialist assistance. However, as you will be well aware, contractors will hit problems every day on construction sites that require solutions to resolve and continue with the works. If the solution to the problem is one not utilised before (or generally known within the market), or not previously used in the UK, then that company will have, in principle, a claim for R&D tax relief in respect of the cost of all work involved in solving the problem. Areas that are ripe for R&D can be technological (ecological and sustainable solutions for example) but can also include the development of tools and materials to improve efficiency, a new method of construction, development of systems to meet health and safety requirements etc.
The relief was launched over 15 years ago, and R&D tax relief now forms a key part of the Government’s plans to boost UK enterprise in the run up to Brexit, with increased spending of an additional £2 billion a year by 2020 announced in last year’s autumn budget.
Why is a law firm solely focussed on the construction industry writing a blog about tax relief?
It is estimated as many as 97% of eligible businesses fail to claim R&D relief that they are entitled to. More importantly, for readers of this blog, construction focused business consultant firm Invennt estimates that R&D in the construction industry could be worth over £1bn a year in R&D tax credits, yet in 2014-15, for example, there were only 480 claims from construction businesses, totalling just £23 million.
That is a big shortfall on tax relief that could be claimed by the construction industry. This is something that construction companies ought to be considering, particularly given the notoriously tight profit margins of many contractors. It is not unusual for contractors who are properly advised in relation to R&D relief to succeed and claim relief on between 7-10% of turnover. Indeed, some projects will be considered to be R&D projects in their entirety.
If anyone is interested in exploring this topic further, we can discuss it with you and introduce you to the key people at Smith & Williamson who form one of the top R&D teams in the country. For further information, please contact me directly.
By Jonathan More