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The Role of R&D Tax Credits in the Growth of UK Construction Companies

To stay competitive in the construction industry, companies must invest in Research and Development (R&D) to develop novel ways to push the boundaries of conventional construction processes, materials and structural designs. Government-backed R&D tax credits can fund R&D work and help construction companies thrive in a vital but dynamic industry.

In 2023, the construction industry made the UK economy £108 billion. With 642,252 construction companies based in the UK, to remain competitive, these companies must practice innovation and prioritise Research and Development (R&D).  But R&D is a risky investment for any company because it costs valuable money, time and resources and the outcome is almost always unknown. This is where the government-backed R&D tax credit scheme can help. Keep reading to find out what R&D looks like within construction, why the government is keen to support the industry with R&D tax credits and how the R&D tax credits scheme can support construction companies, helping them stay competitive.

Why the government is heavily invested in construction R&D

In 2023, the size of the UK construction sector was valued at over £108 billion, making it a central driver of the UK economy and a big part of the government’s ‘build back better’ scheme. Not only that, but to meet net zero targets, the government not only wants to ‘build back better’, but it also wants to ‘build back greener’. They need construction companies to spend time, money, and resources developing new, sustainable ways of building homes, roads, railways, and other infrastructure.

They also recognise that the R&D tax credit scheme is desperately needed to help construction companies overcome challenges such as supply chain disruption, inflation cost pressures and ever-changing compliance regulations.

The impact of R&D tax credits on the construction industry 

R&D tax credits empower construction firms to think outside the box, without financial constraint, meaning they’re able to advance innovative projects designed to boost safety, sustainability, and the adoption of technology, and overcome challenges like supply chain issues, labour shortages, and environmental demands.

Through R&D tax credits, construction companies can develop safer, more efficient, and eco-friendly construction methods, materials, and technologies, driving innovation and growth in the sector, and solidifying a more resilient and advanced landscape for the construction industry.

R&D projects within the construction industry 

R&D within construction is the investigation and exploitation of knowledge and technological advancements that push the boundaries of traditional construction methods, to improve commercial and residential building processes, materials, and structural designs. 

R&D works to find novel ways to address existing construction challenges like: 

• Reducing environmental impact
• Enhancing structural robustness
• Creating cost-effective infrastructure
• Supply chain disruptions 
• Regulatory changes
• Project delays 
• Skills shortages 

But to qualify for the R&D tax credit scheme–which will allow them to claim back a percentage of their qualifying R&D expenses–construction companies must demonstrate how they overcame (or attempted to overcome) scientific or technical uncertainty through trial and error.

📖Read our latest article on Understanding Qualifying Indirect Activities for R&D Tax Credits in the UK 📖

Examples of R&D tax-funded projects in the construction industry

This construction company was working on a listed property where they couldn’t open or alter the windows. They received over £46,000 in R&D tax credits for developing an innovative way of ventilating the site (without needing to open or alter the windows) allowing them to cut and fabricate materials safely. All they did was cut a hole in the wall below a window and attached a pipe connected to an extractor fan which sucked out the dust and debris through the pipe, out of the hole. 

This construction company received £35,935 in R&D tax credits for designing a customisable telescopic load-holder that could bear the load that trusses would normally bear, when roofing, on any site. Nothing like this was on the market at the time of creation and their innovation, funded by the R&D tax credit scheme, allowed the company to grow significantly.

These are just two examples of projects that successfully received R&D tax credits for their R&D work. Other qualifying R&D projects, that break the boundaries of science and technology, might include improving construction materials, implementing innovative construction methods, overcoming technical uncertainties, and developing eco-friendly construction solutions.

Understanding the R&D tax credit scheme

R&D tax credits are a government-funded incentive aimed at encouraging innovation across all sectors, including construction, by allowing companies to claim back a portion of their expenditure on qualifying R&D activities. 

There are currently two R&D schemes that construction companies can apply for R&D tax credits under:

• The SME R&D tax relief scheme 
• The Research and Development Expenditure Credit (RDEC)

Under both schemes, to receive R&D tax credits, the company must be a UK-based, corporation tax-paying business, their R&D activity must qualify as ‘’R&D’’ according to UK tax rules, and the project must be company-funded, aimed at advancing knowledge or solving a technical problem and involve an element of scientific or technological uncertainty.

To be eligible for the SME R&D tax relief scheme, SME’s must also have: 

• Less than 500 employees
• An annual turnover of less than €100 million.
• A balance sheet under €86m

To be eligible for the RDEC scheme, larger construction companies must also have: 

• A staff headcount of over 500
• An annual turnover of €100m or more
• At least €86m in gross assets

To maximise the benefits of these tax credits, construction companies must understand what R&D activities and expenses qualify for R&D tax credits and document their R&D efforts so they can submit a claim to HMRC. 

🔬 Want to understand what 'technological or scientific uncertainty' really means in the context of R&D tax credits? 💡 Click here to read our detailed blog post and gain crucial insights that could maximise your claim! 💸

How to identify qualifying R&D activities

The types of activities that could qualify for R&D tax credits include:

• Developing a new product and getting it to market
• Researching existing product functionality, quality, reliability or performance
• Testing innovative product prototypes
• Improving an existing process to increase efficiency or output, or to reduce cost, waste and bottlenecks
• Building software to sell, lease or license 
• Improving existing construction techniques (eg. manufacturing, welding, drilling, coating, finishing)
• Paying outside consultants to conduct any of the above activities

How to determine eligible R&D expenses 

Expenses that construction can claim, under the R&D tax credit scheme, include: 

• Internal staff costs (including National Insurance and employer's pension contributions)
• Third-party/external/agency worker costs 
• Subcontractors/freelancers
• Software licenses
• Consumable items, such as heat, light and power

How to determine if you’re construction project is eligible for R&D

If you can answer yes to the four questions below, chances are your construction project will be eligible for R&D tax credits: 

Does the project lead to the creation or improvement of a product, process or piece of software?

Is the project technological in nature, has it either been based on hard science (such as engineering, physics or chemistry), or life science (biological or computer)? 

Was there a level of uncertainty related to either the design, capability, method, approach or outcome of your project?

Was the process experimental in nature, have you evaluated alternatives or used a trial-and-error approach to overcome any technological uncertainties? 

But, as always, it’s best to check with an R&D tax specialist to determine if you’re eligible for R&D tax credits and ensure you get the maximum claim possible. 

How to document R&D efforts for tax credit claims

Once construction companies have identified their qualifying R&D activities and expenses, they must ensure they are properly documented for tR&D tax credit claims. Here are some strategies for documenting R&D efforts:

• Create detailed project records: Companies should maintain detailed records of all R&D activities, including project plans, objectives, timelines, lab notebooks, and research papers. It’s also crucial to make sure you have documented the problem you’re trying to solve and how your R&D efforts are addressing it.
• Maintain a log of expenses: Record all expenses that are related to the R&D activities you have conducted. This could include salaries, materials or equipment used, heating and lighting bills and any other costs associated with the project.
• Use language that describes R&D: When documenting R&D activities, use language that describes the scientific or technological advancements you’re making.
• Record the time spent on R&D activities: Keep track of the time you and your employees spend on R&D activities. 
• Seek third-party validation: Keep in touch with any third-party contractors or agencies you have worked with, as they could provide additional evidence to support your claim.
• Document the good and bad bits: Keep a project diary that tracks the progress of your project, what challenges you’ve faced and how you overcame them. Keep a log of all failures too, as these show that you’re trying to overcome uncertainty.  

📖 Read our guide on R&D Tax Credits: A quick guide to technical reports 📖

Mistakes to avoid when claiming R&D tax credits

There are some common mistakes that many companies face when claiming R&D tax credits. Here are some tips to help you avoid them:

Avoid claiming for routine activities: Routine activities such as regular maintenance or simple repairs do not qualify for R&D tax credits. Make sure your claim focuses on truly innovative activities.

Avoid exaggerating claims: Claims that exaggerate the level of innovation or technological advancements are likely to be rejected, so be honest and transparent when making your claim. 

Make sure costs are accurate: Keep track of all your expenses, throughout the project, as determining eligible expenses is a complex process that can lead to errors like including non-eligible costs or missing out on certain R&D costs.

Seek professional advice: Seek professional advice from R&D tax experts to ensure that you’re maximising the amount of R&D tax credits you’re eligible for.

By following these tips, you can claim the maximum amount of R&D tax credits and continue to innovate, grow, and strengthen the UK construction industry as a whole.

🔓Unlock the full potential of your R&D tax credit claim now! 💡 Dive into our comprehensive guide on submitting a winning R&D tax credit claim for UK SMEs – it's a must-read for innovative businesses!

Benefits of getting professional R&D tax help

Working with an R&D tax credit expert, such as those at Myriad Associates, will not only save you time and effort but will also ensure that you get the maximum amount of R&D tax benefit. They know exactly what activities and expenditures are eligible for R&D tax relief and can submit claims that justify those expenses to HMRC, resulting in a better success rate and a bigger claim. 

However, R&D tax credit experts can be a little expensive. So, an alternative to seeking help from a professional is to use Tax Cloud: The UK’s first self-service R&D tax credit claim portal. 

Tax Cloud will walk you through each stage of the claim process, and an expert from Myriad Associates will review your claim, before it goes to HMRC, so they can catch any costly mistakes and make sure you are claiming the maximum amount.

Book a demo, or get in touch if you want to talk about your R&D tax credit claim. 

🤔 Confused about whether to choose a specialist or an accountant for R&D tax credits? 💼🔬 Click here to explore our in-depth blog post and make the best choice for your business R&D tax credit journey! 💸👍

The future of R&D tax credits in the construction industry

The future of R&D and R&D tax credits in the UK construction industry is promising, with many opportunities for construction companies to innovate and grow. With the increasing focus on sustainable construction, R&D will become even more critical in the industry's growth and development.

The 2024 Spring Budget 2024 update is likely to impact the construction industry positively, as the higher rate of Capital Gains Tax (CGT) for residential property disposals will be cut from 28% to 24%, and, as previously announced in the Autumn Statement 2023, the existing RDEC and SME schemes will be merged, with expenditure incurred on or after 1 April 2024, being claimed under the merged scheme. The rate under the merged scheme will be set at the current RDEC rate of 20%. It also announced that it will provide additional relief for loss-making R&D SMEs through a higher rate of payable tax credit from April 2023, where 40% of their total company expenditure is on R&D.

Conclusion

To remain competitive in a fast-paced, high-growth industry–such as the construction one– companies must invest in R&D to develop new construction methods, processes, materials, and designs. Recognising that the £108 billion construction industry is crucial for the economy and to help the UK reach sustainability goals and address the financial challenges companies face when completing R&D activities, the government is running an R&D tax credit scheme that allows organisations to claim a portion of their eligible R&D costs back, allowing them to reinvest in further R&D efforts, which will accelerate their growth and strengthen the UK construction industry, as a whole.

However, less than 5% of R&D claims have come from the construction sector, indicating that many construction companies aren’t taking advantage of the R&D tax credit scheme, possibly due to a lack of understanding over what qualifies as eligible R&D.

If you have questions, contact us, or dive deeper into the world of R&D tax credits with our comprehensive FAQs blog – check it out here! 🔍