Update: Identifying in-eligible clients in Construction
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Something we hear time and again from our clients is that they struggle to identify clients in their client base who would be eligible to claim R&D tax relief. Previously, we’ve tackled the sectors where you might be less likely to find eligibility, but now we want to tackle the top five (according to HMRC’s stats):
- Information and communication (Software)
- Professional, Scientific and Technical
- Wholesale & Retail trade and repairs
Having recently covered software, this time we’re looking at construction. In common with the rest of the top five, the level of eligible R&D to be found in construction is misunderstood, and often overestimated. Experts are often poles apart, with some stating that there’s no eligibility at all in construction, and others preparing claims for anything and everything!
In fact, construction definitely lands more towards the ineligible end of the spectrum – most construction can be carried out without ever doing eligible R&D. However, there are a few projects within some construction that constitute qualifying work, and it’s the high cost of these projects that lands construction in the top five rather than the number of eligible projects. So, join us as we dive into the types of work done by construction companies that you shouldn’t be claiming for!
Within construction, the first thing to exclude from any claim are the associated trades. The chances of plumbers, electricians, roofers, plasterers, and the like having any eligible R&D to claim for is vanishingly small – they’re carrying out routine tasks using well established processes and procedures. The only chance of finding eligibility in these trades is if you come across a company that is designing and developing new ways of doing things that require advances to be made in science or technology, which is generally unlikely.
Construction companies focussed on the building of domestic housing developments are unlikely to be much eligible R&D. The design and construction of such houses has become almost completely standardised, with similar houses being built throughout large housing estates and over many different sites. Where eligible R&D is required in these circumstances, it’s also worth noting that any technical uncertainties will almost certainly have been resolved during the building of the first prototype house, so none of the costs of subsequent house builds would be eligible. For example, the development and installation of improved ground source heat pumps in domestic buildings, where they have not been used before, could have some elements of eligibility, but once this had been successfully achieved once the costs of installation on all of the other houses on an estates would not be eligible.
Construction companies that focus on the building of commercial buildings are more likely to have carried out eligible work, as by their nature these commercial buildings are more likely to have specialised requirements. However, these requirements can often be met using standard techniques without any R&D. In addition, the challenges in this area can often be around budgets, timing or logistics, and can usually be resolved without the need to make advances in an area of science or technology.
Aesthetics, functionality and innovation
As we said about software development, for any construction project, the most important thing you can do is to look beyond functionality when assessing eligibility. A company might be able to construct a building that is hugely innovative in terms of its functionality, but achieve this using established techniques and knowledge. This is especially true when the innovation relates to the aesthetics of a building. Even though this construction work would therefore be commercially innovative, it wouldn’t qualify for R&D tax relief. On the other hand, it’s just as likely that a company could construct buildings that, to all intents and purposes, have no new functionality at all, but that achieve this established functionality in a way that incorporates an advance in science or technology, for example making homes 10x more energy efficient. Even though this work might not look innovative from the outside, there’s a good chance that it would qualify for R&D tax relief.
Ok, so where’s the eligibility?
- Regulatory and environmental requirements: Within construction, especially of commercial buildings, developers are required to comply with a huge amount of safety and environmental regulations, which are often updated. Where a company carried out technical R&D to develop new products, processes or services that enable compliance, this work might be eligible for tax relief.
- Integrating new technologies: Often, construction companies are required to integrate new untested technologies into a construction project. Where this is a straightforward process the company would be unable to claim R&D tax relief. However, companies working with cutting edge technologies that require them to make advances in, for example, engineering or materials science to be able to successfully install the technologies or achieve the required outcome, would be able to make a claim.
- Modular Construction: Construction companies working in non-traditional areas of construction, such as modular design and building, are more likely to be carrying out eligible work. For example, the development of modular building materials, products and processes is likely to involve advances in electrical engineering and civil engineering, and could be eligible for R&D tax relief.
- Supply chain: The supply chain to the construction industry can be far more likely to yield eligible claims than the industry itself. For example, developers of advanced thermal cladding are likely to be making advances in materials science, and software companies developing advanced Building Information Management systems could be advancing software science. Overall, this can be a much more productive area to focus on than looking at ‘pure’ construction companies.