What is in this article?
At first glance you might think this is an article about R&D Tax Relief claims that have gone through successful....but oh no, it is so much worse. Read on to find out how a construction business literally gave away a sum of £40K. 😱 😱 😱 😱
So here's the tale of a construction business that innocently lost their right to £40K cash back from HMRC. By simply doing nothing. Shudder. And it all begins with a DEADLINE. WARNING! We will repeat this deadline several times.
The deadline for making an R&D Tax Relief claim is, 1 year after the year-end filing date of your company tax return i.e. 2 years from the end of the year the costs were incurred. MISS THIS? YOUR TAX RELIEF IS GONE FOREVER.
Dave and his team developed a new piece of construction equipment back in 2015 and 2016. They'd invested heavily in staff for the project, testing materials and working with a subcontractor for aspects of the build.
But there was a problem. Dave has previously been advised his business wasn't eligible to claim R&D Tax Relief. It wasn't until 2019 when we explained why he absolutely could have made a claim.
CASH IN HMRC’s POCKET....£40K FROM 2 YEARS
Name
Dave, business owner
Business
Construction Equipment Manufacturer
Area of Innovation
Development of a new piece of construction equipment, heavily invested in staff for the project, testing materials and working with a subcontractor for aspects of the build.
Year of R&D Expenditure
2015/2016
Deadline to Claim
2017/2018
Total Benefit Missed
£40k cash back from HMRC for 2 years
Reason For Not Claiming
Incorrectly advised they couldn’t qualify for R&D Tax Relief because of the industry they operated within
To be eligible, a business must be making a considerable improvement to existing technology and overcoming a technology challenge. It doesn’t matter what the industry is, if your business is performing qualifying activity you should find if your business is eligible
You can and will lose your claim if you miss the deadline.
- Creating, or experimenting with, new materials for use in construction or engineering projects.
- Developing new or improved technology into existing buildings.
- Adapting equipment or processes to meeting new regulatory requirements e.g. fire, health & safety, sound and thermal.
- Creating and deploying new mechanical and electrical systems into buildings.
- Modifying existing components and fittings into projects.
- Developing new or improved equipment for use in construction.
R&D tax relief is the most valuable tax relief afforded to UK companies. HMRC actively encourage companies who are doing R&D to claim back up to 33% of their costs.
If you are making a profit, you can claim an immediate refund of corporation tax. If you are loss making, HMRC will pay you a cash credit of 33% of the amount you have spent.
We know what you’re thinking: “really?”, or, “got to be a catch”, or, “sounds to good to be true”, or “my business won’t fit the criteria”.
If you’ve got your doubts, here’s the facts you need to know
- SMEs
- Under 500 Staff
- Turnover under €100 million
- Balance sheet under €86 million
- Larger businesses can still claim but at a later rate under RDEC.
- SME claims are now subject to a cap of £20k plus 300% of the company’s PAYE and National Insurance Contribution liability”
Limited companies carrying out qualifying R&D can claim. If you can answer yes to these 3 questions you'll probably be eligible to claim:
- Have you done anything in the last 3 years that has been difficult and you've encountered technical challenges?
- When thinking about these difficulties, have they been related to:
- Science OR technology and making something new, like a new product, process or services, OR
- Improving a product, process or service you already do, for example, make it better, cheaper, more efficient?
- Did you use people with appropriate skills and experience to carry out the work?
* Even projects that fail STILL qualify!
The main categories are:
- Staff costs
- e.g. salaries, NIC, pensions, benefits, expenses, subcontractors
- Materials/ Software costs
- Utilities
- e.g. consumables, heat, light and power
If you've spent money on the above categories as part of your R&D, you should be making a claim!
To calculate your R&D enhanced expenditure you need to identify qualifying expenditure and enhance it by the relevant rate, which are as follows:
• SMEs – 230%. For example, if you spend £100,000 on ‘qualifying expenditure’, a total amount of £230,000 becomes deductible from taxable profits, so an additional £130,000 on top of the original £100,000.
• Larger Companies – 130%. For example, if you spend £100,000 on ‘qualifying expenditure’, a total amount of £130,000 becomes deductible from taxable profits, so an addition £30,000 on top of the original £100,000.
If you are eligible, you can either receive a cash payment and/or Corporation Tax reduction.
When you deduct your enhanced expenditure from your taxable profits, or add it to your loss on your Corporation Tax Return, this will result in:
• a Corporation Tax reduction at 19% if you are profit-making.
• a cash credit (SMEs 14.5% of the loss relating to R&D, large companies 13% of the loss, subject to restrictions)
• Or, a combination of the two.
A new measure limits the amount of payable R&D tax credit (the 14.5%) which a SME can claim to £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NICs) liability for the period.
A company is exempt from this from this cap if:
Its employees are creating, preparing to create or managing Intellectual Property (IP) and it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers (EPWs) by, connected persons.
Right now, the government is throwing yet even more money at business owners, extending support initiatives. Money to help businesses to try survive these gruelling times.
As a business owner you’re probably feeling like you’ve exhausted all of the support, funding, and loans available to you and the truth is that could be the case.
However R&D Tax Relief is an area that is massively underused by so many businesses as they automatically rule themselves out! Take a look at our image below and you can quickly see if you think you are eligible or not.
If you have already made a claim, there may be steps taken to determine if even more funds are available or potentially bring forward future funds.
If cashflow is high on your agenda and you’re considering funding options, this is something you need to explore.
If you’ve been told you cannot claim, book a call with us, get a second opinion, just in case…
A lot of construction businesses tend to rule themselves out automatically when it comes to R&D and likely undervalue the work they do! The construction industry is continually improving, with new plans or ways jobs are done to achieve the outstanding work that comes as a result. Those head-scratching moments and innovative solutions is what R&D is for, something that may seem impossible at the time, even if the project does fail, it can still count toward R&D if you tried to improve on how something was done before! If it's not a routine task then there is a fair chance it can qualify as R&D... at the end of the day it's always better to find out just in case!
Frequently asked questions
Can you claim R&D in the construction industry?
YES! As an industry that thrives on innovation, it’s shocking that as little as 3% of R&D tax credits claims come out of the building trade each year. So many valuable qualifying projects, activities and expenditures are treated as “just day-to-day business” when they could form part of an R&D tax relief claim.
What qualifies as R&D in the construction sector?
Qualifying R&D activity in the innovative use of green or sustainable methods. R&D often leads to an improvement in existing construction techniques to solve site specific or developing new products such as lighter weight, stronger, resilient or easier-to-process building materials.
What qualifies for R&D in Construction?
There are three main areas which R&D claims apply to in Construction;
1. Staff costs
e.g. salaries, NIC, pensions, benefits, expenses, subcontractors
2. Materials/ Software costs
3. Utilities
e.g. consumables, heat, light and power
Can construction companies claim under the Patent Box scheme as well?
Yes, construction companies that have already claimed for R&D tax credits might find that they could claim even more by applying for the Patent Box scheme. However in 2018-19, so far, only 30 construction companies claimed corporate tax relief under Patent Box, so potentially the construction sector is missing out on this opportunity.
Can I claim staff costs in my R&D tax claim?
The majority of most R&D tax relief claims are based around staff costs. This includes people directly involved with the R&D activity and others who were indirectly involved.
An example of direct costs would be someone carrying out the technical roles, the doers of the project. If someone is competent professional whose expertise is part of the R&D effort, then they should be included.
Indirect staff are people who are also involved in supporting the R&D project such as management, procurement, control functions, where they help enable the R&D to happen and also are part of the management of the process. These costs are usually overlooked and can be a big impact on the claim.
How are subcontractors included in my R&D tax claim?
Subcontractor costs can 100% be included within your R&D claim if they were apart of the process! This is one of the most common costs left our of an R&D claim.
Can I claim utility costs in my R&D claim?
The amount of the utility costs you can claim on your R&D claim comes down to how much R&D you are doing within your business. Once we know how much R&D you are doing, we can then proportion of your heat, light, power & water to the R&D tax relief claim.
Can I get help for my R&D claim?
100%! At SaintFG we only work with construction owners so we are familiar with the projects you undertake and what HMRC are expecting whilst maximising your claims to its full potential.
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
PS. Whenever you are ready, here's how to grow your construction business...
1. Join our Facebook Group which built completely for businesses within the construction industry. Real people, real support. - Now also available on LinkedIn.
2. Keep up to date with Construction Insider Providing you with industry insight, tips & tricks and much more to make sure you are ahead of your competitors!
3. When you are ready, Become a Saint Financial Group client, and we will provide you with the highest quality solutions to effectively scale your construction business. Book your meeting here!
Written by the team at:
Saint Taxation
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