Construction can be divided into private sector housing, infrastructure, industrial and commercial sub-sectors; along with public sector housing, infrastructure and other projects.
Within these categories, there is a vast pool of specialist construction companies. These include builders, manufacturers, fitters, trades, engineers and other suppliers. It accounts for about 6-7% of employment in the economy.
Funding for construction projects
Construction projects require extensive funding. By their nature, the majority of the costs are incurred long before any return on investment is realised. Because of this, there are many established construction project finance options out there. For private construction projects, these include:
- Specialist development or construction loans
- Bridging finance
- Mezzanine finance
Even public sector projects seek additional funding options including crown build, leasehold, the private finance initiative and private developer schemes.
One way that innovative companies in the construction sector may be able to gain additional funding is through exploring the R&D tax credit system – these could be seen as tax provisions useful for project finance.
R&D tax credits and construction companies
The R&D tax credit scheme is a government incentive designed to reward companies who carry out R&D to develop new products, services and processes, or improve existing ones. Whilst the scheme has been around since 2000, we know from our own experience that many construction companies are still unaware of its scope.
While awareness of the incentive is improving, there is still a pervasive misconception that R&D tax credits are for those who do science in a laboratory. This is partly due to the very broad terms used by the government to describe research and development. R&D is defined as companies taking a risk whilst trying to resolve scientific or technological uncertainties. Typically, this will be whilst trying to change, modify or replicate existing products, processes or services, or by creating new ones.
The definition of R&D tax credits is purposefully broad so that it can be applied to any industry – not just laboratory-based ones. There are many ways that the qualifying criteria can apply to activities carried out by companies in the construction sector – both in design and prototyping stages, and whilst projects are being carried out on site.
The financial benefits of R&D tax credits to construction companies
The financial benefits of R&D tax credits to construction companies are usually considerable. They work by reducing the corporation tax payable if profitable, or paying out a cash credit if loss-making.
The amount due is calculated by analysing qualifying expenditure (certain staff, material and utility costs linked to R&D activity) and applying an enhancement factor. Typically, it could be worth tens or hundreds of thousands of pounds. You can read more about it on our R&D tax credits explained page.
This may not fund whole projects, but for innovative companies it could be a source of construction industry finance just waiting to be claimed. It can help with cash flow, be used to purchase machinery, hire new staff or be spent on further construction R&D.
Technical challenges when claiming R&D tax credits in the construction sector
When it comes to R&D tax credit claims in the construction industry, we often find that companies encounter technical challenges around qualifying costs. These can hold companies back from hiring new talent and embarking on more innovative projects. Issues frequently arise around subcontracting, record keeping, and identifying project boundaries.
Record keeping is an important part of an R&D tax credit claim, in particular when you’ve progressed beyond your first claim. With your R&D projects, you should document the advances sought and the uncertainties faced from the start.
In the construction sector, R&D will typically take place within a wider commercial project, so identifying the boundaries of R&D activity will be really important to your claim.
It’s also worth recording all projects undertaken and not just ‘R&D projects’. This enables a full review of your activities to be carried out so you don’t miss some qualifying expenditure. You should also keep records of what you’ve spent on consumables too – there are specific rules around what materials you can and cannot claim for which need to be considered to maximise your claim.
Many construction projects are part of a wider development project. When there are a number of companies involved, who claims the R&D tax credits depends on who takes on the risk of the R&D. As R&D is inherently risky, the incentive is targeted at the company who bears the risk. Deciding who this is can be straightforward, but in some circumstances can require contract reviews and a detailed understanding of HMRC’s approach.
In addition, many construction companies will outsource some activity on R&D projects. The nature of your relationship with any outsourced staff such as contractors and subcontractors is also an important factor in any R&D tax credit claim. The relationship needs to be documented clearly from the outset as HMRC will want to know that you’ve correctly identified subcontractors and externally provided workers (EPWs) for your claim.
Understanding the different classifications of workers and how they are handled in an R&D tax credit claim is vitally important in construction company claims. You need to ensure you are recording them appropriately as this will help with the accuracy of your R&D tax credit claim. It will also reduce the chance of queries from HMRC and allow you to put in larger claims where appropriate.
Maximising R&D tax credit claims
Find out more about how ForrestBrown help maximise your future R&D tax credit claims
Knowing when an R&D project begins and ends is key to capturing all qualifying expenditure. With the construction industry, R&D work begins when work to resolve technological uncertainty starts. This could be during the design phase of a project, if there are known uncertainties faced. Alternatively R&D could be triggered by a problem encountered on-site, for which a technological solution is required.
The project ends when the uncertain elements have been overcome. And remember the project doesn’t have to be a success to qualify for R&D tax credits, so if it ends before the uncertainties have been successfully resolved, you can still claim for the costs incurred.
This also encompasses unsuccessful tenders. If you have identified and sought to resolve technological uncertainty in order to present a pitch for a project, you should be able to claim for costs associated with these activities regardless of whether you go on to win the project itself. This is an area commonly overlooked in construction sector R&D claims.
Construction research and development: a case study
One construction company that ForrestBrown have been working with is Poole-based Structural Metal Decks (SMD). They specialise in manufacturing and installing composite decking in non-residential structures. They are at the forefront of their industry and have been involved in many high-profile projects.These include Heathrow’s Terminal Five, the Shard and the Olympic Stadium.
SMD were aware of R&D tax credits, but had been under-claiming because they and their previous adviser had not identified all the qualifying activity.
Our work with SMD broadened the scope of existing claims which had focused on design projects. We were also able to identify work that they were carrying out on-site that represented innovative solutions to problems encountered.
Our review of their qualifying activities meant we were able to more than double the financial benefit they received. Read the full case study for a detailed example of R&D in the construction industry.
So, we can see how R&D tax credits are very relevant to the construction industry and how companies can benefit.
Two stunning, innovative buildings being constructed in 2017
Let’s take a look at some innovative building projects that are going on in the UK right now. We will highlight aspects of them that are likely to involve R&D, and see how solving technical challenges they face could, in theory, qualify for R&D tax credits.
Innovation in a football stadium
Stadium designs have come a long way in the last 20 years. Sporting organisations, often flush with cash, are keen to make bold design statements and harness the latest technology to build sporting arenas that make their fans proud.
One such stadium that’s being constructed is Tottenham Hotspur’s replacement for White Hart Lane. The brand new, as yet unnamed, stadium will see capacity nearly double from 36,000 to 61,000 spectators. It will also have the largest single tier of seating in the UK and boast two pitches: a 22-tonne retractable grass pitch for football, and beneath that a synthetic pitch for hosting NFL games and pop concerts.
Stadiums are bespoke construction projects, so there will be extensive R&D required to ensure success. In the case of Tottenham’s stadium, fan experience and atmosphere are at the heart of the development.
Constructed with acoustics in mind
One example of this is in the stadium’s acoustics. The largest single tier stand – housing
17,000 fans – has been dubbed the ‘wall of sound’. The club have brought in specialist sound engineers who normally work with U2 to provide technical advice. And architects, Populous (who worked on a new arena in our home city of Bristol), have differentiated the design from that of other UK stadiums so that the corners are filled in to optimise the acoustics.
Innovation in seating design and positioning
The seating has many innovations too. Populous, were tasked with producing innovative designs to ensure that seating was positioned closer to the action than any other comparable stadium in the UK.
Special designs have been included to ensure that flexible seating will be fitted in every part of the stadium to provide improved access to disabled supporters. This will better enable disabled supporters to sit with their families.
Some premium locations within the stadium will even include heated seating. While there is nothing new about heated seating – the technology has, for instance, been present in upmarket cars for years – R&D can often occur in modifying existing technology for new purposes.
When pushing the boundaries in construction projects, extensive testing needs to be carried out to ensure everything functions as it is meant to. This type of work has the potential to qualify for R&D tax credits.
When construction projects go wrong
What about when innovations in stadium construction do not go to plan? One example is with Zenit St Petersburg’s new stadium, which is due to host Russia 2018 World Cup games.
This innovative stadium has a roof which is designed to melt winter snow. However, when inspected, its retractable pitch was found to suffer from vibration effects seven-times above that which FIFA deems acceptable. This will surely spark R&D to investigate and fix the problem.
Tottenham’s new stadium is just one of many innovative stadiums being developed around the world. If you want to see some of the others, check out these ten stadiums that are planned or being built right now.
The innovative new US Embassy in London
Another stunning building going up in London is the new US Embassy in the Nine Elms area of Wandsworth. Designed by Kieran Timberlake, it will push the boundaries of energy efficiency, as well as capture the American values of freedom and democracy.
Let’s take a look at the technology behind its green credentials.
One of the greenest buildings in London
Gone are the days of aspiring to be carbon neutral – this building will be carbon negative! That’s right, it will actually create more energy than it uses and export it to the surrounding neighbourhood.
Two bodies that certify sustainability in new and current buildings are LEED (Leadership in Energy and Environmental Design), and BREEAM (Building Research Establishment Environmental Assessment Method). The new US Embassy is aiming to beat its targets with these organisations and get ‘platinum’ rather than ‘gold’ certification with LEED, and ‘outstanding’ rather than ‘excellent’ with BREEAM. So how will it do this?
Innovative lighting in construction projects
Lighting has traditionally been a major drain of energy in buildings. The new US Embassy will minimise this by using the latest LED lighting technology and dual-technology occupancy sensors, as well as being designed to make the very most of natural light.
Energy saving fans and cooling systems
For fans and cooling systems, the building will incorporate the latest technologies including advanced filter systems, passive chilled beams and an underfloor air distribution system. Even the energy required for cooling the building will be recovered from its natural gas fuelled combined heating-power system (CHP) via absorption chillers.
The building’s façade will be a thing of technological wonder. Made from multiple layered laminate glazing, the east, south and west sides will have ETFE (ethylene tetrafluoroethylene) scrim pillows. These have properties that reduce solar glare whilst allowing for an even distribution of daylight. The façade is designed to achieve:
- Reduced wind downdrafts on the plazas below
- Extra visibility to migratory birds to lower the risk of bird strike
- Enhanced insulation
- Self-cleaning and so reduce window-cleaning costs
Renewable energy in modern construction
As well as its CHP system, which has the potential to feed energy back into the National Grid, the new US Embassy will boast other renewable energy technologies.
HIT (Heterojunction with intrinsic thin-layer) photovoltaic panels are some of the most advanced solar energy sources around. In 2014, Panasonic set a record for 25.6% conversion efficiency. The New US Embassy will feature similar panels to produce energy on site.
Innovative water preservation
The new US Embassy will be a showcase for the latest water preservation techniques.
It will have a deep well aquifer which will source drinking water directly from the ground making the building self-sufficient in this regard.
It also features an in-house waste water treatment plant capable of processing grey water and waste water back to a standard of quality suitable for flushing. On the roof, a rain water recovery systems will harvest rain for use in the building whilst also managing storm water to reduce the discharge by 85% important for mitigating flood risk.
We think you’ll agree, it is shaping up to be a fascinating building.
Are you innovating in the construction industry?
As the examples in this article illustrate, there are many ways in which innovation takes place in the construction industry. To summarise what we have looked at here:
- Creating or experimenting with new materials
- Coming up with new ways to implement energy saving techniques
- Integrating new technology into buildings
- Solving technical problems that arise during or after construction
- Using science or technology to improve user experience in modern buildings
- Modifying existing components and fittings into bespoke projects
These may sound like familiar activities within the construction industry, and they all have the potential to qualify for R&D tax credits.
ForrestBrown have one of the largest teams of chartered tax advisers that specialise in R&D tax credits in the UK. We work for companies of all sizes, and have a proven track record of identifying all the qualifying R&D and claiming the correct amount – not too little so that a valuable resource is left unused, and not too much and risking an HMRC enquiry.
If you think you may qualify and want to talk to an expert, or have already claimed but want to check you claimed for the right amount, then give us a call today. Our friendly, professional tax team will be happy to help.