Investing in innovation? Tom Woods, partner, Menzies LLP. says architecture firms should consider if they can claim R&D tax relief.
Relatively few architectural practices claim R&D tax relief, despite the fact that their activities often meet HMRC’s eligibility requirements.
The solutions designed and developed for construction-related problems could qualify for these valuable tax reliefs, helping firms to offset their investment in innovation and enhance profitability. But how do practices know if their investments meet the criteria for R&D tax credits and how easy is it to make a claim?
Many people think of R&D as a ‘scientific’ activity that would normally take place in a laboratory or an engineer’s workshop. For this reason, architectural practices may not realise that investments in problem-solving activity could be eligible for R&D tax credits.
Under HMRC’s definition, qualifying R&D expenditure must make an advance in science or technology. This can either be a new process, product or service, or an improvement to an existing one. In addition to creating an advance that is not currently available, the activity should overcome uncertainty and provide a solution to a problem that could not easily be solved.
For example, many firms are involved in work that is pushing the boundaries of traditional architecture or innovations focused on reducing carbon emissions from construction activities. Such activities, which often require investment in new research or technology, may qualify as R&D expenditure.
Practices looking to claim R&D tax credits will fall under one of two schemes – the Small or Medium-sized Enterprise (SME) scheme or the Research and Development Expenditure Credit (RDEC) scheme. If a firm has no more than 500 members of staff and either an annual turnover of less than €100m or a balance sheet of under €86m a year, it can claim under the SME scheme. Firms which fall outside of this threshold can claim a Research and Development Expenditure Credit.
Under the SME scheme, eligible firms can claim a deduction for 230 per cent of their eligible R&D expenditure. As such, for every £100 of qualifying costs, the business can reduce its taxable profit by £130 on top of the £100 spent. Loss-making companies can also surrender their losses in return for a tax credit. The RDEC scheme enables larger companies conducting qualifying R&D activities to claim 13 per cent of their qualifying expenditure as a tax credit, although this itself is taxed.
For the majority of architectural firms, the wages of employees working on R&D projects are likely to be their main cost, however, the wages of any subcontractors involved in projects and the costs of software and materials may also qualify.
Thorough record-keeping throughout all project phases is key to making a successful claim. This should involve keeping time sheets to monitor expenditure and ensure that all eligible costs are incorporated. It’s also important to have a good knowledge of any other grants and funding that the business has received, as it may make a difference to the category of tax relief that can be claimed.
Seeking the support of professional tax advisers can help firms to reduce the time and effort needed to make an R&D tax claim. R&D tax experts can also support firms in preparing a report, known as a ‘technical narrative’, to accompany their claim. This should incorporate company background information, an explanation of how eligibility criteria have been met and a detailed breakdown of the project costs.
It’s worth bearing in mind that overly aggressive claims can result in an unwanted HMRC investigation, potentially leading to a claim being refused. As such, businesses should aim to develop a clear understanding of the schemes’ eligibility criteria and develop their claims accordingly.
Practices should also be aware that LLPs are unable to claim R&D tax relief. However, there are often commercial reasons for having a limited company within the wider group structure and these companies could make claims if they incur qualifying expenditure.
With many architectural firms demonstrating a problem-solving approach in responding to construction-related challenges, in particular the need for low-carbon solutions, many businesses could qualify for R&D tax incentives. By understanding HMRC’s definitions of R&D activity and getting the right expert support, they could begin to take advantage of this valuable relief.
Tom is a partner and property specialist at Menzies, a top 25 accountancy firm in the UK. The firm’s accountants, finance and business, and private client advisors operate out of a network of offices across Surrey, Hampshire, London and Cardiff, providing our clients with easy access and local knowledge. MENZIES offers a full range of services – tax, corporate finance, audit & assurance, business recovery and forensic accounting, as well as strategic advisory, outsourced services, people solutions, wealth management and business valuations.