R&D Tax Relief spotlight

30 March 2022

This quarter Stephen Watts, Head of the Construction & Built Environment Sector at Fortus, and the sector team talk all things Research and Development (R&D) and how the proposed legislative changes could affect the sector as well sharing tips on how to maximise and de-risk your claims.

Question 1 – The R&D tax legislation has been around for 20 years, yet we have seen an increased awareness of this in the sector over recent years. Why do you think this is?

RICHARD HENDERSON – R&D tax awareness is increasing in the construction sector because more and more small/medium and large companies are financially benefiting from the tax relief and word is getting out. Word of mouth is very powerful. People in the industry are talking, using their terminology to explain the scheme to help others understand in relevant terms and situations. These conversations are giving construction companies confidence in recognising R&D works.

NORMAN TAYLOR – Professional bodies, RIBA and RICS, have effectively raised awareness of the scheme. There’s also been a real push by regulated providers such as Fortus in identifying companies who have potential qualifying R&D activity. Less experienced firms entering the market have also contributed to a sales push, which’s had a negative impact on the willingness of businesses to consider making a claim. Plus, the lasting effects of COVID’s resulted in many companies seeking additional ways to bolster their balance sheets, and R&D Tax Relief is a legitimate way to achieve this.

VIC ULFIK – The R&D Tax Credit scheme has been around for over 20 years now and over that time has changed considerably. The initial 50% uplift on qualifying expenditure to the current 130% is a real benefit if you’re carrying out qualifying R&D as companies claiming will receive 30% more than they spent as tax relief.

However, the scheme has attracted a lot of interest from unregulated R&D Tax Relief firms. HMRC and the rest of the regulated industry, including Fortus who are members of the HMRC’s R&D Consultative Forum, have been very concerned about this influx of firms to the market. Claiming companies are finding it difficult to differentiate between regulated firms from those who aren’t. Quite often the claims from unregulated firms are unsupported and overinflated, putting the client at risk of fines and penalties equal to the claim value, and even prison sentences.

Question 2 – So, what are these proposed legislative changes?

VIC – As a consequence of the increasing numbers of unregulated ‘tax boutiques’ entering the market, HMRC have identified a number of changes that will restrict these firms from operating in the way they have been and ensure only those companies carrying out qualifying R&D activities can claim. A draft of these proposed changes is due to be published this summer (2022) and Fortus will contribute to the feedback to ensure it meets the needs of our clients. As I sit on the HMRC R&D Consultative Committee, Fortus will be at the forefront of any advice in relation to the changes. We’ll ensure clients receive an update on the draft proposals with our views and what changes we’ll be making to ensure our clients receive their full entitlement under the R&D tax credits scheme and are fully protected.

What are the changes likely to be? Early indications suggest HMRC will be looking for companies to pre-register their proposed R&D activities in the year prior to carrying out the R&D. This’ll clearly cause problems for those companies wishing to claim R&D tax reliefs as much of the current R&D work is a result of difficulties arising within a project or contract which were unforeseen, and an innovative approach was needed to complete the work(s). Additionally, it may restrict companies who’ve not previously claimed R&D tax reliefs because if they’ve not registered their proposed R&D activities in the previous tax year, they might be unable to claim for previous years and the current year. This would limit their claim to the end of the next tax year. So, if a company wanted to claim R&D tax reliefs and they had qualifying R&D activities, it could be well over 18 months before they could make a claim.

As stated, this is part of the proposed changes and yet to be discussed with HMRC. Fortus (and other regulated business and tax advisory companies) will be making their views known to influence HMRC in coming to a workable and acceptable change in the claim process.

Question 3 – How do you think these changes will affect the sector?

MICHAEL STEAD – The outlined proposed changes seem to encourage a shift from reactive to strategic development which may work well for the sectors which utilise the scheme the most (Engineering & I.T.). This type of shift demonstrates little. It’ll be important to implement process changes within the built environment and construction sector who’ll have the opportunity to demonstrate their agile approach to problem solving. There’ll be an opportunity to work with sector specialists to ensure they’re armed with new knowledge to make successful claims.

VIC – Clearly a more proactive approach will be needed from companies who wish to claim R&D tax reliefs and Fortus will be there to support all our clients. We’ve already been providing education workshop as well as other supportive activities for clients within claiming companies to ensure all qualifying R&D activities are identified, recorded and claim values are upheld.

We may have to change our process to include the changes HMRC wish to implement but this shouldn’t impact claiming companies. It’ll only be to ensure clients receive the best advice, support and service when making a claim. At the end of the day clients outsource the process to us so it’s on us to minimise the impact of any changes.

Question 4 – What are the common misconceptions and pitfalls you’ve come across when talking to clients in the sector on R&D?

NORMAN – The biggest misconception is around which activities constitute legitimate R&D activity and can be used to support a successful claim. This is in part a result of the terminology used by HMRC in their guidance documents. Many companies believe they do not undertake R&D, making it difficult to engage properly.

Another misconception relates to how long it takes a company to prepare information for a claim to be written. A good provider will explain this in simple terms, reducing the hours spent by companies identifying qualifying activity.

MICHAEL – The most common misconceptions are that companies have to be profitable, their R&D is successful and at the cutting edge of science or technology. Company owners and management often dismiss the benefits of the scheme because they don’t have a dedicated R&D department. The guidelines as to who and what qualifies are purposely all encompassing to ensure a wide range of innovators have access to the scheme. People don’t realise that appreciable improvements are relative in different ways to each individual sector and circumstance. However, the biggest misconception is around the amount of time required to make a claim. Often business managers don’t realise the benefits far outweigh the returns. One reason for this is the misconception that really detailed records have to be kept to join the scheme.

Question 5 – What’s your advice for businesses in the sector that are either already claiming or are considering claiming for the first time?

RICHARD – Most construction companies are already unknowingly undertaking R&D works on any given project.  The secret’s recognising when the R&D work begins and finishes and not confusing it with general construction problems.

If you’re new to the scheme, the terminology of explaining exactly what construction works qualify as R&D can seem like a foreign language. Don’t let this deter you. At Fortus, specialists from the construction industry talk and understand the same language as you. They can and will assist with identifying if any R&D has been undertaken in the last two years.

If your business has previously claimed R&D tax, you’ll be familiar with the process. However, to assist your future claim, you need to think about how you record R&D works throughout your tax year. It’s possible, without realising, you already undertake a form of record keeping. The indication that R&D is happening might be captured in your drawing register, i.e. ‘Why has a detailed drawing gone from revision A to revision H?’ or ‘Why is the QS claiming for so many variations?’ Also delays, ‘Why has the job stopped progressing?’… these are potential R&D areas to explore.

Also, talk to those on-site – Site Managers/Site Supervisors. Make R&D part of the site meetings, whether it’s the progress meeting or the client meeting. You could capture the R&D and add to the minutes.

NORMAN – Be careful who you appoint to support you with your claim. Ask if they’re regulated to do this work, what their process is and how much work they require you to do.

Don’t assume that a low fee means you’re getting the best value. A low fee generally means low time input, poor quality outputs and little support if there is a query from HMRC. Often your claim will not be maximised.

A regulated firm will be totally up to date on what is coming in terms of new legislation from HMRC. Unregulated firms can expose you to the risk of fines, penalties and even prison.

Finally, be aware that many general practice accountants will not have the dedicated sector expertise and experience needed to ask the right questions to prepare both a robust claim and most importantly, maximise your entitlement. They may do a great job doing your accounts and tax returns, but R&D tax reliefs are a very specialist area of tax.

VIC – Unfortunately, 80% of companies that could make a successful R&D tax relief claim are not claiming. The reasons are many including a distrust of HMRC and the scheme itself (too good to be true), and they don’t think they carry out qualifying R&D (because their accountant or a mate down the pub said they didn’t!)

My advice is to talk to an expert – a regulated business and tax advisor (Fortus) and we can evaluate the work you do and give you an honest assessment that will allow you to consider claiming. Our average claim is £50k and all you need is just one conversation with Fortus to find out if you qualify.

For companies already claiming R&D tax reliefs I ask you to consider:

  • How to develop and implement better record keeping (peoples’ time and materials used) to ensure you maximise your claim
  • Put R&D tax reliefs on your monthly management meeting’s agenda to help identify current and future work that may qualify. If the average claim value is £50k per year, isn’t it worth having it as an agenda item?

Question 6 – If you were the Chancellor, what one policy change would you introduce to make the scheme more effective for the sector.

NORMAN – I would make the legislation and guidance documents for clients clearer and less off putting. If a lay person reads the current guidance, they get the impression that they do not carry out qualifying experience.

VIC – Offer a first-year incentive to companies who’ve not claimed before, 150% of qualifying expenditure. This would create interest and raise awareness of the tax relief, encouraging companies to seek out further information from ‘regulated’ providers.

MICHAEL – As it’s often impossible to clearly map out solutions to uncertainties without a plethora of mitigation strategies, it would be more effective to introduce greater regulation. The easiest policy change to implement would be around regulating the types of companies that can assist claimants. This could be bolstered by ensuring that assessors, on both sides, are also competent professionals from relative sectors.