Tom Walker, partner at Wellers, the small business accountants, discusses R&D tax reliefs and how they can benefit housebuilding and the wider construction sector
MAKE UK recently reported that the UK’s business tax and regulation system makes the nation’s manufacturing companies uncompetitive. It isn’t just manufacturing companies that are hit by the UK’s complicated tax system, almost every sector including construction is subject to various obscure tax regulations one way or another.
In fact, the UK’s tax system is one of the most complicated in the world which, in part, is due to its history and consequent length.
To put it into perspective, the UK tax code is so long that it’s more words than the average person will read in their lifetime.
This size and complexity have created several different loopholes and opportunities to reduce the amount of tax businesses need to pay.
An opportunity for UK businesses to reduce their tax exposure is to make use of the various legitimate tax reliefs available.
One of which is the Research and Development (R&D) Tax Credit.
What is R&D tax credit?
The R&D tax credit is a form of tax relief given to certain businesses that are deemed to be bettering the UK with their research and development pursuits.
Why is R&D tax relief good for the UK economy?
This specific tax break helps the UK economy in several ways. Firstly, it can contribute to the creation of jobs as it encourages the pursuit of new and innovative solutions. This inevitably requires manpower, knowledge, and skills.
It also helps the UK respond to growing challenges presented by the global business landscape, such as climate change.
For businesses, it helps those pursuing new innovations to reduce their tax bill which means they may increase their profits. This in turn will likely encourage further investment.
How do I qualify?
Businesses that are investing in new areas of possibility through R&D may qualify for cash or Corporation Tax reductions through this tax relief.
Specifically, R&D is defined by HMRC as part of a specific project that makes advances through the resolution of uncertainty in science or technology.
In the housebuilding sector, this could be research and development into new products that will increase thermal efficiency to reduce carbon emissions in line with the Future Homes Standard (2025), for example.
To claim R&D tax relief through HMRC, you must prove the project:
• Helps advance a specific field
• Encountered issues in its implementation
• Attempted to overcome these issues
• Could not be resolved by an industry professional
Or you can ask yourself the following five questions:
1. Have you developed your own software?
2. Have you developed internal processes that reduce costs and improve production times?
3. Has your company made advances in science and/or technology?
4. Are you in the business of manufacturing goods?
5. Are you using existing technologies uniquely?
If you’ve answered ‘yes’ to any of the above, you should be speaking to a tax advisor about making a claim.
What can I save?
R&D tax credit can equate to huge savings. The relief allows businesses to:
• Deduct an additional 86% from their qualifying costs from yearly profit. Alongside the normal 100% deduction, this makes a total deduction of 186%
• Claim a payable tax credit if the company has claimed relief but overall made a loss, the payable credit is worth up to 14.5% of the loss
The construction industry is a key area of the UK’s economy that could be benefitting from R&D tax reliefs, but many firms don’t realise it. On the face of it, many don’t consider construction to be a STEM industry.
However, so much goes into the construction of the buildings of tomorrow, from the designs themselves to the methods and products used, that this could be a significant oversight and tax opportunity.
R&D tax credit can save businesses a significant amount of money by reducing the amount of tax payable meaning there is more left in the pot for reinvestment.
But don’t forget the world of tax relief can be very complex and time-consuming.
Submitting a claim to HMRC isn’t very straightforward and submitting a fraudulent claim, even if it is accidental, can land you with a fine and can even trigger a full tax investigation.
So, it’s best to work with an experienced advisor who can guide you through the process and ensure everything is above board.