Tax incentives for construction innovation
It is estimated that the value of R&D which is eligible for tax relief in the UK construction industry is almost £1bn, but the UK construction industry has only claimed around £80m with average claims almost £30,000 lower than average claims across other industries.
Clearly this huge gap is evidence that people are either unaware of the tax break, do not know how to go about making a claim, do not believe that their activities are innovative or that they do not meet the criteria.
Recently HMRC has introduced a new cap for small businesses and it is important that this does not put off companies which are genuinely entitled to claim the tax benefits.
The Government’s R&D tax credit scheme was introduced in 2000 and is designed to promote innovation by rewarding companies which carry out R&D to develop new products, services and processes, or improve existing ones. It applies to all businesses but the construction industry has one of the lowest uptake rates, at around 3%.
The simple premise is that companies which spend money developing new products, processes or services or enhancing existing ones, are eligible for a cash payment and/or Corporation Tax reduction.
So where does R&D lie in the construction industry?
Well, it does not have to involve a lab and a white coat. It can simply be new engineering solutions which solve problems, it might lie in the design of innovative new scaffold methods to improve health and safety or the development of tools or technologies which improve efficiency or reduce environmental impact.
And the qualifying criteria can apply to activities carried out at both the design and prototype stages and also whilst projects are being undertaken on site.
Re-introduction of a cap as an anti-fraud measure?
Whilst the scheme has been around for almost two decades a proposal announced in the Autumn Budget 2018 will see the return of a PAYE/NIC cap for small and medium sized enterprises.
The original R&D legislation for the SME scheme, which was introduced in The Finance Act 2000, included a PAYE/NIC cap, however this was removed in 2012.
The reintroduction of a cap is being positioned by HMRC as an anti-fraud measure and follows the arrest of three men suspected of attempting to fraudulently claim £300m in R&D Tax Credits back in June 2016.
The Budget paper reads ‘To help prevent abuse of the payable credit, from 1 April 2020, the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year. This will ensure the relief is robust against identified abuse, including fraud, following the prevention by HMRC of fraudulent claims worth £300 million.’
The Government is demonstrating that it is taking a stance against the system being abused where structures had been set up deliberately to claim the payable tax credit, despite the businesses having little or no actual employment or activity in the UK.
It is perhaps surprising that the cap is not being reintroduced until accounting periods after 1 April 2020 given that this is essentially an anti-avoidance measure.
How will the cap affect construction businesses
While it is encouraging that the Government is looking to prevent fraudulent R&D claims, the cap could impact companies which for genuine reasons have small PAYE/NIC liabilities.
Indeed, this was a criticism of the original cap, particularly for companies such as start-ups which do tend to have legitimately low PAYE/NIC liabilities.
Even though it is reassuring that the proposal is for a cap of three times the company’s total PAYE/NIC payment for the period – a marked increase on the one times limit for the old cap – there will still be some smaller companies carrying out real R&D. For example, companies which are perhaps using agency workers rather than employees who’ll be caught by the reintroduction of the cap.
The cap will apply only to claims for the payable tax credit without affecting the calculation of the enhanced R&D expenditure itself and that any amount of loss that cannot be surrendered for a payable R&D credit as a result of this cap will still be available for the company to carry forward in the usual manner.
For SMEs who currently benefit from the cash flow advantage of the payable tax credit, this may be of little consolation though.
Is the construction industry missing out?
Given that only 3% of claims come from the construction industry it is highly lightly that eligible compaies are missing out on significant tax breaks. If you are interested in knowing whether you qualify for the SME R&D Tax Credits entitlement speak to our dedicated team to ensure you are maximising your ability to claim.
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