Unlocking Extra Cashflow: The HMRC Research & Development Tax Relief Scheme
If your company works in construction, then I already know one thing about your business: you innovate every day. Innovation and problem solving are at the heart of what we do; designing and building things is just how we solve these problems. And in today’s climate of delivering more for less, LEAN and cost-efficiencies, innovation is an essential part of getting pre-qualified, staying competitive and remaining in business. (And if you don’t work in construction and are reading this, it might well apply to your company too.)
However, innovation comes at a cost – key experts are taken away from their day-to-day work (the billable part of the job) to help develop new strategies, processes and products, or improve existing services. Add in the time from supporting staff who help deliver these new projects, and innovation becomes a costly venture.
But what if there was a way to get some of this expenditure back?
Fortunately, there is. In 2000, the government introduced a scheme that allows companies that undertake research and development projects to reclaim the costs for these projects. For companies that qualify as a Small to Medium Enterprise (SME), the relief claimed can be as much as 130% of your costs. You can read more about it on GOV.uk, or even Google “hmrc research and development tax relief” and you’ll find plenty of information.
Why Is the Government Offering This?
The government recognises that innovation is a key economic driver. They estimate that for every £1 invested in new technologies, a further £1.50 to £3 is generated for the economy. However, only 40% of companies who can claim this relief actually do so – and in construction, I suspect this figure is substantially less.
Why Didn’t My Accountant Tell Me This?
Your accountant probably does know about this relief, but if you aren’t already claiming it, it may be because they think you don’t qualify. If you read the official GOV.uk information, the language used is extremely off-putting: phrases like “scientific and technological advances” make it sound like only scientists building self-aware robots are eligible.
Is My Company Eligible?
If you aren’t scientists building robots, the good news is you probably still qualify. A “scientific or technological advance” can mean different things to different industries – for that matter, so can research and development. If you are trying to make the products and services you provide within the construction industry better, if you are trying to develop new products that meet a need and bridge a gap, if you are trying to refine your processes using new technologies to be more cost-efficient, or if you are developing new working methods for new problems encountered on site, you’re probably already doing research and development.
I know for a fact that there are companies pushing the envelope of traffic management technology with new safety products, that companies are using scientific methods to develop self-healing concrete, and that engineering consultancies are developing new methodologies to design projects faster and cheaper (BIM for starters, but there are many more.) We are simply not accustomed to describing ourselves and the work we do using this wording. But when you put it in that light, aren’t most of us seeking to advance the construction industry in some way?
However, your company size affects what scheme you can claim under. The R&D Tax Relief scheme is available to small and medium enterprises (SMEs), which means you must have less than 500 employees, less than £84 million in turnover, and less than £72 million in balance sheet assets. You’ll also need to be a limited company. Under this scheme, any projects that you identify as research and development can’t be as a result of a grant or subsidy or subcontracted to you by another company. Finally, the only expenditure you can claim tax relief on has to be tax-deductible expenses, such as staff costs, software or consumables.
If you are a larger company that doesn’t qualify as an SME, you can claim up to 13% of your qualifying R&D expenditure under the Research and Development Expenditure Credit instead.
Why Doesn’t Everyone Claim? What’s the Catch?
Besides believing that they don’t qualify, the other reason may be that there are criteria that need to be met. Here are the criteria as set out on GOV.uk – I’ve copied this direct from the link I provided above and added my thoughts after each point.
To get R&D relief, you need to explain how a project:
looked for an advance in science and technology (you’ve tried to make something new or better to address a problem),
had to overcome uncertainty (you weren’t sure how you would achieve this),
tried to overcome this uncertainty (your team looked at different ways of achieving the desired result),
could not be easily worked out by a professional in the field (experts at other companies couldn’t look at your results and know exactly how you got there, they’d have to go through the same process themselves), and
your project may research or develop a new process, product or service or improve on an existing one (pretty much everything we do in construction – provide services, processes or products). Note that projects don’t have to be successful in order to be eligible, as long as you can prove that you tried to overcome the uncertainty around the advance.
While the wording of the criteria themselves may be off-putting, when it is translated into normal language it’s easier to see how, actually, your company probably does have elements of research and development that are eligible for this scheme.
What Do I Need to Do to Apply?
First, you need to identify the projects that have taken place within your business that have an element of R&D. When you first apply, these projects must have taken place within the last two financial years; after that, you can submit projects for R&D tax relief every financial year provided they have started within that financial year. You’ll need to prepare a report that describes how each project tried to develop a new service, product or process and overcame the uncertainty around developing it. You’ll also need to provide information about the experts in your company who helped develop the new approach or product.
Along with your technical report, you will also need to provide a breakdown of the qualifying costs for the project – so how much staff time was spent on the research and development, and what consumables or software were purchased. This needs to be provided as a list to HMRC along with your report, detailing how much you are claiming the R&D tax relief on. This figure gets entered into your full Company Tax Return form (CT600), and the supporting information (the report and schedule of costs) are then sent to HMRC using their online services.
After HMRC has validated and approved your claim, the amount that is eligible for R&D tax relief is deducted from your company profit, reducing the amount of Corporation Tax that you owe. If there are any refunds due – for example, for previous tax years – these are credited to your bank.
Where Can I Read More?
This is just a brief summary, but you can read more about research and development for tax purposes on GOV.uk as well as their publication from the Department of Business, Innovation & Skills which defines what research and development means.