Build July (2016)

Build Magazine 72 There is, however, a fly in the ointment. This revival has led to a flurry of applications from construction firms for tax breaks on spend relating to R&D. HMRC, however, is taking a cautious, fact-finding approach to these – a significant portion of the claims in recent months are being held up for enquiry as a matter of course. This may be as a result of HMRC when it first established innovation tax breaks, not foreseeing these applying to the construction sector. After all, houses, offices, rail-lines, dams… haven’t these been around for decades? How much innovation can truly be going on here? Well, quite a lot, actually. Generally speaking, when people think about innovation and R&D, the perception is that only people in white lab coats do R&D, and that it’s all about blue-sky thinking. Yes, that is R&D in the purest form but in reality and for the purposes tax incentives it’s actually far broader than many realise. Different from accounting, engineering or ‘more traditional’ definitions: it states that to be eligible a company needs to be seeking ‘an advance in science or technology… through the resolution of scientific or technological uncertainty’. Due to the various definitions out there and the limited guidance on R&D for tax purposes, many in the construction industry itself don’t understand the far stretching applicability of the tax definition (regime). A surprising amount of activity construction firms undertake project-to-project can fall under this rubric: effectively, R&D continues up until the point where problem-solution becomes known or routine in nature. Within the industry there is sometimes a perception that this point is at the end of the design phase, but in fact a lot of substantial problem-solving continues into the construction phase, as firms grapple with issues that cannot be (or were not) resolved by the design. Constructors continually innovate new techniques, methodologies and solutions to overcome these on-the-ground challenges. To give just a few examples: • Breakthroughs in the use of the latest building technologies (e.g.Post-tensioned, innovative formwork designs or temporary works, and modular construction) • New techniques developed to overcome site restrictions (space or access) or soil constraints (e.g. hidden aquifers, contamination, or unstable soil) • Development of an advanced remediation solution by creating a unique mix of additives and mixing these with the soil to improve its mechanical qualities • Green innovation, such as new techniques or processes to reduce waste, increase recycling, or lower carbon output • The creation of a complex scaffolding and temporary works design to overcome challenging conditions The list above is far from exhaustive, but gives a flavour of the variety of activity that can potentially be claimed for under R&D tax legislation. It’s important for a construction firm to have a wide view of R&D. Generally speaking, the distinct challenges posed by a site and its environment can make or break projects. When considering what might be eligible, the following questions provide a good starting point: Would a competitor have struggled with any of the problems experienced? What is the business most proud of in relation to the project? Were there any points at which the firm was unable to use an off-the-shelf or industry standard solution, and how did it get around this? Just as the construction industry needs wider awareness of how it can benefit from tax schemes designed to reward innovation, the current impasse with HMRC is a result of the latter’s unfamiliarity with the challenges construction firms overcome in the course of their work. The current rash of enquiries should be seen in a positive light; HMRC is attempting to better understand the industry, and the process will hopefully be an educative one on both sides. In the meantime, however, the high rate of enquiries means that construction firms should consider seeking expert, third-party help when it comes to assessing eligibility and compiling robust R&D tax claims. Part of the problem is that HMRC’s guidelines, as currently written, are rather vague and non-sector-specific. Without knowledge of the process and an understanding of HMRC’s mindset, it can be difficult to ‘speak its language’ when making a claim. A good partner will be able to put an HMRC ‘hat’ on and provide upfront, in-depth analysis of a project, so that a firm can maximise its claims without wasting resources (e.g. many companies make the error of claiming costs that are explicitly defined as ineligible under HMRC’s rules, such as hire and plant costs). Construction Is an Innovative Sector – and Should Be Rewarded as Such Construction While the picture may be more mixed on a national level, construction is booming in the South East, and within the M25 specifically. You only need to cast an eye around the London skyline to see that the post-2008 malaise has finally lifted, with numerous large, challenging projects springing up across the region.