Identifying Eligible Clients in Construction | Q&A
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A big thank you to all who came to our “Identifying Eligible R&D Clients in the Construction Sector” webinar earlier this month!
For those keen to view the footage in its entirety, we’re attaching a recording of the webinar: click here to access the password-protected recording (Password: +4py52UN). Make sure to leave out any spaces in the password as all characters are counted!
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Now, without further ado…
1) As construction projects are usually contracted or subsidised do you always claim under the RDEC scheme?
First question, first ‘it depends’! It’s true that most construction is done under contract or subsidised in some way, but it will depend on the details of the contract or subsidy whether the claim has to be made through the SME scheme, RDEC or a mixture of both. In fact, certain contractual arrangements would prevent the company making a claim at all! For example, a small construction company being contracted by an SME to do R&D would not be able to make a claim, whereas the same work being contracted to the SME by a Large Company could be claimed through RDEC, and if the SME undertook the R&D outside of a contracted project, they’d be able to claim through the SME scheme!
2) What’s your view about architects? My client tells me they are doing lots of work on incorporating new materials in different ways, stressing environmental advances.
There’s definitely eligible work to be found in Architectural practices – we’ve covered this in detail before, but in short, as long as the practice is advancing science or technology in some way, they may be able to claim. Top tip – a lot of Architectural practices used to be set up as LLPs, so make sure you check that they are a limited company first!
3) Would construction companies specialising in environmental & sustainable building be the best places to look for eligible R&D claims?
We’re not sure about ‘the best’, but these types of construction companies are definitely worth focussing on when it comes to R&D tax relief! They’re far more likely to be working in new areas and developing new technologies than a more traditional company, so you’re more likely to find eligibility.
4) If a competent professional was sure that something would work due to their previous experience, would this leave a question mark on the technological challenges and therefore the claim itself?
Yep! If a competent professional knows how to achieve the advance at the beginning of the project, this means that there are no ‘technological uncertainties’ and the project would not be eligible for R&D tax relief. However, in our experience, what often happens is the competent professional will reach a point in a project where they have exhausted all of their knowledge and the advance still hasn’t been achieved. At this point the project does have technological uncertainty, and any work done from this point would be eligible.
5) If a competent professional is outside the claimant company itself, for example a specialist consultancy brought into work on the project, should the claim be looked at for that entity as opposed to the construction firm itself?
Sadly, this is another ‘it depends on the contractual arrangements’. This is too big an area to go into in detail here, but our best advice is to imagine what would happen if HMRC requested a conference call with your client. Would they be able to produce someone with sufficient knowledge to answer technical questions about the advance and technological uncertainties? If the answer to this is ‘no’, then that suggests that the claim might not belong to them.
6) How do you establish whether there is a competent professional in the claimant company or not? Surely it’s a bit subjective as to what counts as a competent professional, and surely not only the top ‘professionals’ in the industry can claim R&D?
It’s true that deciding who is and is not a competent professional for R&D tax relief purposes can be a little difficult – in fact, the BEIS guidelines don’t give any definition of what is meant by competent professional, assuming that this is self-explanatory. HMRC have issued further guidance on this, defining a competent professional as some who would be expected to:
be knowledgeable about the relevant scientific and technological principles involved,
be aware of the current state of knowledge, and
have accumulated experience and be recognised as having a successful track record.
From this you can see that the term ‘competent professional’ could be applied to a wide range of people involved in a project, and doesn’t restrict it to just the top professionals in the industry!
7) In terms of what is ‘readily deducible’ to the competent professional, how do we distinguish between what is an advancement of their own knowledge as opposed to an advancement of industry knowledge? They may not be using established techniques; however, they may be solving a problem that other construction firms have faced in the past.
This is a good question, but unfortunately not one with an easy answer. The terms ‘readily deducible’ and ‘publicly available knowledge’ are not defined anywhere in the guidance, so working out what to claim can be tricky. CIRD80520 states that the claimant company must be able to explain ‘why the knowledge or capability sought was not readily deducible by a competent professional in the field’, and we’re seeing this being questioned more and more in enquiries. Our advice would be to make sure that your client can evidence that they researched the problem and any publicly available information before embarking on the R&D project, and they are happy that they could not have come to a solution without carrying out the R&D.
8) Are companies that are set up as SPVs (special purpose vehicles) eligible to claim?
Yes! As long as the SPV is a limited company and subject to UK corporation tax, it should be able to claim R&D tax relief.
9) We had a client that carried out a project to design and install bespoke canopies – the architectural design was such that our client was uncertain whether the angles/aspects could be successfully achieved when they started out. In that circumstance, could you say that the technical uncertainty was not resolved until the construction was actually complete? And therefore would the construction costs all qualify for relief?
From this description, it seems that you could consider this development to be a ‘first of class’ – a high-value prototype building in which there are elements of R&D and elements of commercial production. To quote HMRC, in this situation ‘it is unlikely…that the total build costs would qualify for R&D relief and it will be for the company to demonstrate which activities are items within the total build costs which directly contribute to resolving the technological or scientific uncertainties.’
What this means is that you’d have to examine all of the activities involved in the project and work out which were part of the commercial build and which were required to resolve the technological uncertainties, and divide up the costs accordingly. The other thing to remember is that any raw materials that end up in the final build cannot be claimed for – you can only claim for material used, consumed, or destroyed during the R&D elements of the project.
10) Could a construction company who specialise in remedial work or repairs, who find themselves having to find novel or bespoke solutions to problems, be eligible?
Potentially, yes! As long as the company is required to advance science or technology to successfully develop solutions, there’s a good chance they would be eligible to claim.
11) If the work is based on applying new materials and working within a conservation area or listed building, would the constraints of the original building enable eligibility?
Again, potentially yes! Anything that restricts or prevents a company using standard or established techniques or knowledge could lead to an eligible project. As usual, it all comes down to whether overcoming these restrictions requires an advance to be made in science or technology.
12) Our client is doing a long construction project. An SME claim was made in 2019. CBILS were received in 2020 so an RDEC claim will be made. Can the claim revert to an SME claim in 2021 if CBILS funds were fully used in 2020? If the project is tainted for its lifetime, do we need to amend the 2019 claim?
This is a good question, and the honest answer is we really can’t be sure! According to the rules around grants, once a project has received state aid funding it has to be claimed through RDEC for the life of the project, even once the grant funding has ended. However, it would be unusual to have to amend a previous claim, because in the main grants are not awarded to ongoing projects.
Unfortunately, these rules cannot be easily applied to CBILs funding. In our opinion, you wouldn’t need to amend the claim for 2019 – the funding wasn’t used in that year, and wasn’t given specifically for that project. As you say, for the 2020 financial year, the project would have to be claimed through RDEC, assuming that the CBILS funds were used directly on the project. As for the future, we’ve no information to go on as to how HMRC will treat these projects in subsequent years. Again, because the funding wasn’t received for that specific project, there’s a good chance that a company would not be penalised for reverting to claiming through the SME scheme, but to give a definitive answer we’ll have to wait for HMRC to either issue further guidance or open enquires into claim such as these.