Around £3.5bn of research and development (R&D) tax relief support was claimed in the 2016/17 financial year, corresponding to £24.9bn of R&D expenditure according to the Office for National Statistics.
ONS figures also show that there were a total of 39,960 R&D tax credit claims, most of which – 34,060 – were made under a government scheme set up specifically for SMEs.
Yet around 3.5% of the claims came from the construction industry, which is hugely represented by SMEs. These 1,365 claims resulted in payments of £80M.
Sectors taking most advantage of the tax credit scheme were the manufacturing, professional, scientific and technical, and information and communications sectors, accounting for 70% of all applications between them.
What does R&D mean to engineers?
So why is the uptake for construction so low? Business consultant Invennt director Tim Fitch says it is because of those in the construction sector fail to grasp what the government means by R&D.
“R&D has a stereotypical definition of what it looks like,” says Fitch.
“As an engineer, if you close your eyes and think about what R&D looks like, you think of a white room, a laboratory with long tables and microscopes and people in white coats. That is what engineers typically think of R&D as.”
However, when it comes to Her Majesty’s Revenue & Customs, the definition is wildly different.
For R&D tax credits, R&D is broadly defined as a “dealing with technological uncertainty” and “dealing with systems uncertainty”.
That definition, in itself, is off-putting, says Fitch. “Speaking as someone who has been in the construction sector for 25 years, when I first read that, I didn’t know what that meant in the context of the construction and engineering sectors.”
He has since interpreted “dealing with technological uncertainty” as “managing technical risk”, a common part of construction work, and “dealing with systems uncertainty” in a civil engineering context as meaning designing sub-systems to work together. His business, Invennt, specialises in advising civils firms about how to make claims.
Fitch says that those in engineering and construction are being “modest”, and that realising that a lot of their day-to-day work qualifies as innovation could bring huge benefits to their companies.
“There is a huge untapped benefit,” Fitch says.
“People tell me they don’t do specific ‘R&D’ projects and just work for their clients, but that goes back to the definitions of R&D; it’s in the day-to-day, solving the day-to-day problems where the untapped opportunity lies for construction.”
Benefits can extend beyond tax credits, says Fitch, as he has seen noticeable improvement in company morale when project workers see their innovations rewarded.
“The process of uncovering this R&D also changes the culture of the business and the people involved day-to-day,” says Fitch. “And as we tease out all the problems they have overcome, there is a real uptick in morale as they realise some of what they are doing is classed by the government as R&D and is being rewarded.”
Government R&D credit guidance for small businesses says: “in general, [construction] is a traditional and well-proven industry. However, an increasing number of companies undertake R&D to exceed the traditional methods in terms of life expectancy of buildings, durability or robustness”.
One cited example of a successful claim from a construction business was from a company that designed modular laboratories to combat contamination during repairs.
“The company designed some new buildings with removable sections,” says Fitch. “Exterior walls could be slid away and a unit could be removed in total and replaced by a new unit before the exterior walls were slid back into place.”
Fitch stresses that not all claims need to be of such a large scale, and can be as small as individual elements within a project.
Another example he cites is of a firm modifying a wood coating material to allow it to use cheaper materials, while maintaining the original design quality. The guidance goes on to say “significantly this development was a small element of an overall conventional project”.
“Only after discussion with the site foreman did the company directors realise that the modification and application of the coating qualified for R&D relief,” explains Fitch.
In fact, the opportunities for small businesses undertaking innovations such as this are substantial.
Businesses with less than 500 staff and turnovers of under £90M or a balance sheet total under £77M are eligible for small and medium sized enterprises (SME) R&D Relief.
This allows these companies to deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.
They can also claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.
Larger companies and businesses are still eligible to claim for their R&D work and can receive a tax credit for 11% of qualifying R&D expenditure up to 31 December 2017 and 12% from 1 January 2018.
Claimable costs include direct and externally-provided staffing costs, subcontracted R&D, consumables, software, trials, prototyping and independent research costs.
Under the tax code for this relief, companies can also apply for work done up to two years ago.
The purpose of this scheme is for companies to reinvest the benefits back into R&D and foster innovation, and the key to expanding this for construction is knowledge, says Fitch.
“How many engineers have read the tax code? Or had it translated into language they can understand?” he asks. “The key is translating how tax authorities define R&D and innovation and explaining how this maps onto what construction companies, consultants and contractors and engineers do day-to-day.”