In addition to wanting all new builds to be environmentally friendly, the new UK government also aims to retrofit existing homes to help to meet national net-zero goals. However, advancing sustainability in construction is a difficult task.
Many businesses are already having to deal with interest rate changes, rising material costs and skills. Nevertheless, focusing on sustainability and innovation can limit losses through research and development (R&D).
Construction businesses are already carrying out substantial research and innovation to meet sustainability requirements, but there is still a long way to go if the UK is to achieve its net-zero targets: ensuring that these efforts are eligible for tax relief and that businesses apply for it remains a challenge.
Clarity will help credit claims in stricter regime
Construction as an industry makes the fourth highest number of R&D tax credit claims, with 4,000 registered in 2022.
But there are still countless firms not taking advantage of the relevant credit schemes. One of the challenges they face is recognising whether they are eligible – particularly when it comes to sustainability.
R&D tax credits are granted to businesses to reimburse them for investments that aim to develop new products, processes or services, or to improve existing ones.
However, even if your company is the first to use a specific technology in the UK, it may be hard to state what you had to do to make it work to improve sustainability.
Properly understanding what makes a process eligible and being able to communicate this clearly in your application can be challenging.
Some R&D activities that could qualify for tax credits include trialling new materials, developing prototypes and solving problems.
Your work doesn't even have to be successful to be eligible, which will help your company limit losses while supporting creativity and innovation.
Though R&D tax claims are common in the construction industry, changes made to the way they are processed over the past few years have resulted in more refusals than ever before.
The scheme has come under scrutiny for perceived abuse; but this has meant that some genuine applications have also been refused.
Stricter oversight of the scheme in the past two years might mean that businesses are discouraged from making applications or taking risks with innovation, for fear that they will not be able to recoup any of their investment.
While the government has tightened control of the scheme to stamp out abuse, genuine claims are still being processed and helping construction businesses limit their losses.
This emphasises the importance of understanding the requirements of the scheme and making a rigorous, clear application.
Businesses must choose scheme and ensure eligibility
Some of the requirements to be aware of when considering your application are which scheme to apply for and what the eligibility criteria are.
The two schemes available are merged R&D expenditure credit and enhanced R&D intensive support. The former is new, and merges two previous schemes, namely R&D expenditure credit and SME tax relief, and covers businesses of all sizes.
The enhanced R&D intensive support scheme offers increased reimbursement for loss-making SMEs; but it requires a business to have fewer than 500 employees, a turnover of less than £84m or a balance sheet total of less than £72.6m.
For any applications that you are backdating to claim for expenses incurred in the previous two years, you'll need to take the former schemes into account.
The expenditure credit scheme covered larger businesses, while the SME scheme was open to businesses below the same thresholds as the new intensive support scheme.
If work is to be eligible, it needs meet criteria such as:
- trialling and developing systems that could improve performance
- developing bespoke approaches
- adapting to changes in legislation or industry requirements.
To understand properly how work at your company fits with either of the schemes, you may want to appoint a designated person who reviews projects and keeps track of innovations.
Case study shows how R&D expenditure recovered
RandD UK worked with a timber frame manufacturer to recover £164,000 over two years in R&D grants.
The manufacturer supervises and supplies the design and manufacture of roof trusses, floor joists and on-site installation for clients.
It manufactures all its own materials and is committed to innovation to ensure its construction partners focus on sustainability, while also encouraging profitability.
The company is continually investing in expanding product development, design and off-site manufacturing capabilities, which is where RandD UK has been able to help recover costs for process and material innovation.
Innovation can play role in preventing loss
Construction businesses are facing multiple challenges to their bottom line. But by using creative strategies to innovate, they can help prevent losses while committing to sustainability to benefit the industry and the country as a whole.
The R&D schemes, used appropriately, are an important tool to achieve net-zero targets.
Construction companies should therefore take the time to understand how to apply in a way that ensures their claims are accepted.