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R&D Tax Credits - the 5 pitfalls
1 August 2021
The construction sector’s the UK’s second largest sector. In the first quarter of 2021, it showed rapid growth, with the CPA (Construction Products Association) forecasting that output will rise by 12.9% this year. Yet, when it comes to claiming R&D tax credits, the number of claims made is still significantly trailing other sectors, such as Manufacturing, IT, Scientific and even Wholesale & Retail trades.
When we think about construction, we tend to think in terms of design and aesthetic outcomes rather than the engineering advances themselves. But it’s R&D stemming from those head-scratching moments that enables buildings to be built. However, most of the eligible R&D within building and construction businesses is hidden. While a pharmaceutical or technology company will have a specific budget dedicated to research and development, in construction, eligible expenditure’s often spread across a variety of different activities and departments and specialist companies.
If the notion of ‘head scratching moments’ resonates, you may be undertaking qualifying activity for an R&D Tax Credit claim. If that’s the case, then you’ll need to think about how best to identify, record, quantify and present the R&D work to HMRC, in order to maximise your claim, and more importantly, stay within the rules of the scheme.
Here are some common pitfalls which can reduce your claim, or put it at risk:
1. Not understanding the true nature of R&D within your business
There’s still the prevailing view that R&D ‘isn’t done here’ as it’s ‘just part of our day job’ (if only we had a £1 every time we were told this from architects, engineers and contractors over the years!).
But, a much deeper understanding of what constitutes an advance and the nature of the technical uncertainties in your business can, not only release much needed cash back into the business, but can also pin-down an unquantified overhead and help improve your knowledge of your own Intellectual Property. Working with a R&D partner that has genuine sector expertise, so can ‘speak the language’, often helps maximise the claim and unearth R&D in parts of your business that you weren’t aware of.
2. Incomplete record keeping
Given the hidden nature of the R&D in the construction sector, it’s a pretty sound bet that you’re not keeping records on what you’ve done exactly and at what cost. Contract fulfillment’s paramount, but you may be missing out on an opportunity to maximise any claim by not keeping accurate records. For instance, in the construction sector, inaccurately accounting for workers outside of the company, either subcontractors or agency staff, can significantly impact on your claim. Addressing this early can ensure future R&D claims are maximised and can be robustly defended.
Accurate records also help defend any claim, should HMRC want to take a closer look. They will expect businesses to be able to support their claims with supporting records especially if you have a claims history. This is something Fortus supports clients with.
3. Not truly understanding the worth of the scheme
If senior management aren’t engaged in the process and don’t fully appreciate the likely benefits, then it can make the claims process unnecessarily more demanding. Win their hearts and minds by highlighting that the benefits of R&D contribute to the bottom line, so are worthy of attention, especially when considering the equivalent turnover on a construction project that would be required to generate a similar net position.
This is where it helps greatly if your R&D partner has sector expertise, so they can get across the benefits clearer and more succinctly.
4. Doing it yourself
As the scheme’s part of the HMRC corporation tax self-assessment system, companies can submit their own R&D claims with HMRC.
However, as with most tax legislation, it’s quite complex and it’s no different when it comes to R&D. Keeping on top of legislative and case law updates can be time consuming and risky if it’s not your area of expertise, even if you have a Finance Director in place.
By using a specialist service provider (you wouldn’t expect us to say otherwise!), they’ll know what level of information to submit and what HMRC are expecting so you don’t need to write ‘war and peace’.
Select a R&D Partner who’s part of a regulated body like ICAEW, ACCA or CTA and has experience in successful claim submission, with a clear process for obtaining and presenting your work to HMRC. We know what HMRC want, so it makes both yours and their jobs easier. With ever increased powers, you certainly don’t want to fall foul of HMRC.
5. Submitting your claim under the wrong scheme
Finally, and probably most importantly, if you or your R&D partner aren’t completely familiar with recent HMRC trends and upcoming legislation, you could submit an incorrect claim. Make sure your R&D partner’s giving the most up to date information and is guiding you to the correct claim submission, otherwise you could lose your claim or worse, incur penalties and fines. This is very topical at the moment, especially for the construction sector so watch this space for a further blog.
So, in your own business, consider whether you’ve had any ‘head scratching moments’, tell us about them and we’ll help you determine their eligibility. Email our Construction & Built Environment team and we’ll see whether these question marks could indeed have a monetary value to them.
Introduced in the Finance Act by the government in 2014,... ...