R&D tax relief remains key to meeting construction’s net zero target

Gareth Randle is senior sector specialist at ForrestBrown

There is no doubt that the UK’s construction sector is crucial in driving the country’s economic growth. As outlined by the recently published Construction Playbook, the industry supports more than two million jobs in the UK and is expected to bring in £31bn of contracts across economic and social infrastructure projects over the next year. In part this is being driven by the government’s ambition to build back greener as part of its plan to hit net zero targets by 2050.

“Incentives like 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 firms also need to strengthen their cashflows alongside their focus on developing more sustainable methods of building homes, transport links and other infrastructure. Increased labour costs and supply chain disruption are already impacting profitability for many businesses in the industry. For these firms, incentives like R&D tax relief can play a vital role, ensuring they can continue to innovate through tough market conditions.

Yet there are still challenges for the industry to overcome to harness the full power of this key component of the innovation toolkit. If construction businesses are to keep innovating as part of the government’s ambition to build back greener, these will need to be addressed.

Uncertainty is a brake on innovation

One of the key hurdles to overcome is establishing clarity around who ‘owns’ the R&D carried out within construction supply chains that often involve multiple contractors and subcontractors.

In such cases, determining which entity should claim relief – and on what expenditure – can be a complex task, with the potential to discourage companies from making use of the incentive. HMRC has not acted to resolve uncertainty resulting from its position on this issue, despite a tribunal judgement which described its interpretation as “wholly out of kilter” with the commercial reality faced by construction firms.

None of this is to say that construction firms should be put off claiming R&D tax relief. However, it is imperative that those which do are aware of the issues and seek advice on the proactive steps they can take to protect themselves in the event of an HMRC inquiry.

Rate changes and increased compliance

HMRC’s plans to combine its Research and Development Expenditure Credit (RDEC) and SME incentives into a single scheme could also pose challenges, particularly if this locks in the existing lower rate for smaller companies where cashflow issues can be more severe.

While the rebalancing of rates between the two schemes in favour of RDEC could be seen as a boon for large businesses, net benefits may be outweighed by the stresses placed on SMEs in their supply chain from reduced access to funding from R&D tax relief.

This rebalancing was in part driven by a desire to address abuse of the SME scheme, where most error and fraud is believed to occur. 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 claims. While eradicating abuse is essential, this twin-pronged approach does risk some businesses that claim legitimately becoming collateral damage through a reduction in benefits received, or being put off claiming at all because of negative background noise about R&D tax incentives.

Changes to the R&D ‘rulebook’

The government’s Construction Playbook is a positive step towards modernising the construction sector and encouraging firms to focus on much-needed innovation. There is a key role for R&D tax relief to play to help the sector achieve this objective, but construction firms need to approach the incentive with eyes wide open.

That means being aware of the latest changes to the R&D ‘rulebook’ (such as the additional information HMRC will require in advance of all claims submitted from 1 August this year) and making sure methodology and documentation are fit for purpose in the climate of increased compliance activity.

Companies in the sector should continue to explore R&D tax relief for projects where they are seeking to innovate, but they need to be confident in their claim preparation, keeping records and preparing clear technical justifications to demonstrate the uncertainties projects are addressing.