GAINING R&D KNOWLEDGE CAN BRING REWARDS FOR YOUR PROPERTY BUSINESS
Relatively few architectural practices claim research and development (R&D) tax relief, despite the fact that many activities meet the scheme’s eligibility criteria. 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 criteria required by HMRC. Qualifying expenditure must make an advance in science or technology. This can either be via the introduction of a new material, 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 these areas could qualify as R&D expenditure.
DECIDING WHICH R&D SCHEME APPLIES to your Architectural firm?
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, with annual turnover of less than €100m or a balance sheet total under €86m. Architectural firms working on R&D projects which fall outside this threshold can still make a claim, but through the RDEC scheme, which is not quite as rewarding.
Under the SME scheme, eligible companies can claim 230% of their qualifying R&D costs as a reduction against trading profit. This means that for every £100 of qualifying costs, the business could reduce its profits subject to corporation tax by £130 on top of the £100 spent, meaning that the £100 effectively costs £56.30.
The scheme is also great for businesses in their early stages, where losses are more likely to be seen. In certain circumstances, companies can surrender their losses in return for a tax credit up to 14.5%, giving an effective cost of £66.65 per £100.
Those companies within the RDEC scheme can get a net tax saving or claimable credit of 10.53% of their qualifying expenditure.
The wages of staff working on R&D projects are likely to be the main costs incurred by architectural firms looking to claim tax credits. However, other expenditure, such as subcontractor costs 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 maintained, recording expenditure as projects progress; ensuring that all eligible time 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 also help businesses and reduce the burden.
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.
As a false claim can result in a fine and the tax relief not being paid, 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. HMRC are also tightening their compliance requirements to restrict spurious claims, so it is important to seek the advice of reputable R&D specialists.
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. However, advisors can work with you to determine whether your operations could be restructured so that any specific R&D is carried out via a connected company, which could then claim the relief.
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 rewarding opportunity.