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Everything contractors need to know about looming R&D tax credit reforms

Will imminent reforms increase or hinder take-up amongst building companies of HMRC’s analysis and improvement tax credit scheme? David Prosser investigates

Will building firms miss out on helpful incentives designed to encourage innovation below a shake-up of the analysis and improvement (R&D) tax credit scheme? His Majesty’s Income and Customs (HMRC) says it’s decided to crack down on abuses of the system, however some tax specialists concern an imminent tightening of the principles may deter legitimate claims.

The precept of R&D tax credit is straightforward sufficient. First launched by the then Labour authorities in 2000, the thought is to make use of the tax system to incentivise funding in R&D that has the potential to drive innovation and development. Corporations successfully get to say a refund of a part of their R&D prices, often by way of a lowered company tax invoice.

In recent times, nevertheless, concern has grown that some firms have tried to stretch the principles so as to declare tax credit they aren’t owed – or have even dedicated outright fraud.

Once we look intimately, we virtually at all times discover exercise they may have claimed for however have ignored

Thomas Boaden, Ayming

The federal government’s official estimate, launched in July, is that such abuses value the Treasury £1.13bn throughout all sectors of the financial system within the 2020-21 monetary yr alone.

In response to long-standing issues, HMRC has introduced a sequence of modifications designed to make the system extra strong. From 1 August, all claims for tax credit should be submitted digitally via an HMRC portal and signed by a named director of the corporate making use of. Corporations that haven’t claimed earlier than should pre-notify HMRC of their intention to make their first declare. The scheme may even be restricted to R&D going down within the UK – so a UK enterprise pursuing R&D in an abroad market will now not be capable to declare for it.

It’s not all dangerous information. The scope of the scheme can also be being tweaked to mirror rising applied sciences – companies might be allowed to incorporate the price of information analytics and cloud computing, for instance. Nonetheless, some specialists are involved that crimson tape may put firms off claiming, as would a concern of being investigated, with HMRC having employed 100 extra inspectors to audit R&D tax-credit instances.

“The modifications will doubtless be a blended bag for building firms,” says Richard Clutterbuck, a tax specialist at freelance-engagement specialists The Guild, which advises the Nationwide Federation of Builders. “On the one hand, the reforms herald better administration, as the style in how claims are made is altering and extra info will have to be equipped. Then again, what you possibly can declare tax credit for is increasing; forward-thinking and technologically literate building firms that utilise datasets and cloud computing will now profit.”

The Institute of Chartered Accountants in England and Wales can also be involved, significantly in regards to the pre-notification and non-UK declare modifications. “We don’t consider these measures would have the impact of limiting the variety of non-valid claims,” a spokesman says. “As an alternative, they’ll place extra administrative burdens and limit aid out there to real claimants.”

That might be significantly unlucky in building, the place there may be cause to suppose that many firms are already under-claiming R&D tax credit. The sector makes up 9 per cent of the UK’s financial system, however HMRC statistics present that, in 2020/21, the latest yr for which information is offered, building companies accounted for less than 6 per cent of the £6.6bn of complete tax credit paid out.

Underused by business

Some companies do perceive the worth of the scheme and are securing vital advantages from it. For instance, annual outcomes lately revealed by Laing O’Rourke reveal that it spent £33m on R&D within the 12 months to 31 March 2022 and secured £4.7m of tax credit accordingly. However different companies have been slower on the uptake.

“The R&D tax-credit regime is extensively underutilised by building firms,” says Clutterbuck. “If the federal government needs extra individuals to make use of the system, it might want to do extra to assist companies perceive and embrace innovation and, critically, to understand how far more accessible the R&D tax credit are than is often perceived.”

The issue for now’s that many contractors merely don’t recognise the place R&D is going down inside their companies. Because of this, they fail to make a declare for tax credit, or solely declare partially. “Companies are usually conscious of the R&D tax-credits scheme, however they’re too conservative, or they solely give attention to the actions of 1 division,” says Thomas Boaden, senior enterprise improvement supervisor at Ayming, a consultancy that helps firms with the claims course of. “Once we look intimately at their companies, we virtually at all times discover exercise they may have claimed for however have ignored.”

The which means of ‘R&D’

In the end, R&D is about making technological advances to beat obstacles or resolve uncertainty. Within the context of building, that may very well be something from the revolutionary use of supplies to a brand new method of working in a tough location. R&D is likely to be embedded in a brand new answer that the development firm employs, or in a brand new course of.

You want each technical and monetary experience to make the declare in the suitable method, with the suitable info

Sam Turner, Leyton

“On building websites there are sometimes distinctive circumstances through which solely a bespoke answer will meet stringent efficiency requirements or legislative necessities,” says Peter Corley, head of R&D at regulation agency Gateley. “There isn’t a single kind or model of R&D in building,” he provides, however factors to a number of examples of the kind of work that may qualify. Trialling new supplies to be used in tasks, figuring out enhancements in processes or to merchandise and software program, adapting gear or processes to satisfy new regulatory necessities, and growing or adapting instruments may all be eligible for assist, Corley suggests, however there might be many extra.

“In the end, there are three key hoops you have to soar via,” explains Sam Turner, enterprise improvement supervisor at Leyton, one other specialist adviser on claiming tax credit. “You should present there was a scientific or technological uncertainty, that you’ve made an advance in tackling this uncertainty, and that this work is systemic – that’s, the advance could be utilized elsewhere.”

In different phrases, firms should present they’ve recognized an issue and give you an answer that they’d be capable to profit from once more sooner or later. That drawback is likely to be on web site, but it surely may additionally be in the best way they work.

Choices for giant and small

Companies with legitimate claims may even have to work out which of the 2 R&D tax-credit schemes they qualify for. Possibility one is small and medium-sized enterprise (SME) R&D aid, which is open to companies with fewer than 500 staff and turnover of lower than €100m per yr or a stability sheet price lower than €86m.

Within the SME scheme, R&D aid allows firms to deduct 230 per cent of their qualifying prices from their yearly revenue, or to say a tax credit score if they’re lossmaking. What that is price precisely will rely on the element of your monetary efficiency, however worthwhile companies can declare tax aid that entitles them to a refund of as much as 26p for every £1 spent on company tax; for loss-making companies, the refund is price as much as 33p per pound.

Not all companies will qualify for the SME scheme. Bigger firms are robotically excluded, however a small minority of R&D tasks are additionally outdoors of its scope – the principles get fairly technical right here.

Through which case, a enterprise might want to apply to the R&D expenditure credit score (RDEC) scheme, which is much less beneficiant. RDEC pays credit price 13 per cent of qualifying R&D expenditure; on the present 19 per cent company tax price, that’s the equal of 11p for each pound spent.

It’s necessary that firms usually are not delay by the crimson tape: each schemes can show profitable – and, in each instances, companies can declare retrospectively for the previous two monetary years. The common declare made via the SME scheme final yr was about £57,000, rising to £633,000 by way of RDEC.

How, then, to maximise your probabilities of making a profitable declare? “You should hold very detailed data, masking time spent on tasks, funds made, and so forth,” advises Leyton’s Sam Turner. “You additionally want each technical and monetary experience to make the declare in the suitable method, with the suitable info, significantly about how you will have made an advance on the earlier expertise baseline.”

Getting the element proper is particularly necessary for building companies, the claims of which can be intently scrutinised by HMRC inspectors making an attempt to grasp the duties of contractors, subcontractors and purchasers for a mission. The principles are designed to reward the get together taking the monetary threat of investing in R&D, and HMRC has issued a number of controversial rulings on this challenge (see field, beneath).

“The secret’s to have a declare that preempts these questions,” says Ayming’s Thomas Boaden. “Getting that proper could be time-consuming, however a proper inquiry from HMRC after the declare is made might take even longer to resolve.”

Given these complexities, many companies choose to work with a specialist marketing consultant that may assist at every stage of the method, from figuring out all eligible R&D claims the agency might have, to submitting the declare, and to coping with any subsequent HMRC enquiries. In return, such consultants take a share of the worth of the credit score secured.

Corporations ought to select consultants rigorously, primarily based on their observe document of working with comparable companies, but additionally their prices. Charges of between 15 per cent and 25 per cent are broadly typical, however there are extremes. Word that the most affordable consultants might provide little greater than template varieties and supply scant value-added assist.

HMRC takes on building firms within the courts

Two current instances illustrate HMRC’s willingness to struggle its nook within the courts on R&D tax-credit disputes – underlining the necessity for firms to become familiar with the scheme’s technicalities.

In a single case heard earlier this yr, contractor Quinn gained its attraction towards HMRC’s choice to disclaim it full R&D aid. The tax authority’s unique ruling was primarily based on its view that the prices for which Quinn was in search of tax aid had been “subsidised” – that’s, that they had been met by a 3rd get together.

The case checked out examples of its tasks together with its refurbishment of the Gunnersbury Park Museum in West London (pictured above), the close by Pitzhanger Manor constructing, in addition to the fit-out of an workplace referred to as Radio Home in Cambridge.

HMRC accepted that Quinn’s work generated new technological data and functionality, and that this may very well be exploited in future technical work. But it surely argued that Quinn’s purchasers had paid it to do that work – and due to this fact that the price of the R&D had been not directly subsidised.

That rivalry was in the end rejected by the courts, which argued that HMRC’s strategy was too restrictive and will stop many different firms from bringing claims for aid. However the case doesn’t set a precedent that each firm can depend on, with HMRC having had success in comparable disputes.

Certainly, final yr, the authority gained a case towards Hadee Engineering, arguing that it, too, was benefiting from a subsidy from its purchasers when finishing up R&D. These purchasers included Sheffield Forgemasters, the place it was tasked with designing a brand new course of to fabricate hole metal ingots.

HMRC additionally took challenge with Hadee’s argument that, as an knowledgeable in its area, the authority ought to settle for its assertions that its work met the definition of an R&D mission below the regulation. And, on this dispute, the courts selected to uphold HMRC’s choice.

The underside line is that disputes over R&D tax credit could also be finely balanced. Within the building sector, it will be significant that firms perceive whether or not shopper funds for work are undermining their claims for aid – they usually should hold good data of R&D work that HMRC may examine for itself.