Relatively few architectural practices claim research and development (R&D) tax relief, despite the fact that some of their activities meet the scheme’s eligibility criteria, and the main reason is a lack of awareness.
For many people, R&D programmes are regarded as an essentially ‘scientific’ activity that would normally take place in a laboratory or an engineer’s workshop. For this reason, architectural practices may not realise that the solutions they design and develop for construction-related problems could qualify for these attractive tax incentives.
By developing a clear understanding of what constitutes eligible R&D activity and adopting a meticulous approach to the claims process, architectural firms can help to offset their investment in innovation and add value to their bottom line.
Understanding HMRC’s definitions
To qualify for R&D tax credits, the activities undertaken must meet with the detailed criteria set out on HMRC’s website. Qualifying 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. As well as creating an advance that is not currently available, the activity should also overcome uncertainty and represent a solution to a problem that could not easily be solved.
With growing demand for inspiring, energy efficient, sustainable buildings, constructed in challenging urban or brownfield spaces, architectural design projects increasingly require a problem-solving approach. This is not always possible using conventional methods, and new research or technology may be needed. For example, design software, computer modelling and/or 3D printing, can be used to achieve the desired outcome and investment in this area could qualify as R&D expenditure.
Deciding which R&D scheme applies
There are two schemes for firms looking to claim R&D tax credits – the Small or Medium-sized Enterprise (SME) scheme and the Research and Development Expenditure Credit (RDEC) scheme. Businesses can claim under the SME scheme if they have no more than 500 members of staff, an annual turnover of less than €100m or a balance sheet of under €86m a year. Architectural firms working on R&D projects which fall outside this threshold can claim a Research and Development Expenditure Credit.
Under the SME scheme, eligible companies can claim 230% of their qualifying R&D costs. This means that for every £100 of qualifying costs, the business could reduce its corporation tax liability by £130 on top of the £100 spent. Loss-making companies can, in certain circumstances, surrender their losses in return for a tax credit.
By contrast, the RDEC scheme allows large companies carrying out qualifying R&D activities to claim 13% of their qualifying expenditure. The wages of staff working on R&D projects are likely to be the main costs to architectural firms looking to claim tax credits. However, other expenditure, such as the wages of subcontractors involved in a project and investment in software and materials may also qualify.
Making a successful R&D claim
In order to make a successful claim, it is essential that firms keep accurate records throughout the design and building phases. Timesheets should be kept to track expenditure as the project progresses; ensuring that all eligible costs are incorporated into a claim. As alternative funding can make a difference to the category of tax relief that can be claimed, it is also important to have a comprehensive knowledge of all grants and funding that the business has received.
While busy firms may be put off by the time involved in making a claim, this can be overcome by collecting information at convenient times, for example, during audits, or when accounts and tax calculations are being undertaken. Professional tax advisers can help businesses to streamline the process and reduce the burden.
As a false claim can result in a fine, businesses should make it a priority to develop a clear understanding of the eligibility criteria and plan ahead carefully to avoid an unnecessary HMRC investigation. It is also important to bear in mind that as some architectural firms are LLPs, they do not incur corporation tax and therefore will not be able to benefit from R&D tax credits. An exception to this rule is when LLPs undertake work and make claims from a specifically-established R&D company.
To help streamline the claims process, applicants may wish to engage the support of an external third party to help prepare a report, known as a ‘technical narrative’, to accompany their claim. This document should include company background information; a description of how eligibility criteria have been met and a detailed breakdown of the project costs.
Created to promote innovation, R&D tax relief can offer significant benefits to architectural firms taking a problem-solving approach. By developing a clear understanding of HMRC’s definition of R&D activity and ensuring this is fully reflected in any claims they make, these firms can benefit significantly from this untapped opportunity and enhance their profitability.