Few architectural firms request R&D tax relief, even though their activities usually meet HMRC’s requirements. The solutions designed for construction-related issues could qualify for these valued tax reliefs, aiding firms to offset their outlay in innovation and improve profitability. But how do firms know if their investments meet the conditions for R&D tax relief and how easy is this process?
Many people think of R&D as a ‘scientific’ activity that would generally be undertaken in a laboratory or an engineer’s workshop. As a result, architectural firms may not understand and realise that investments in problem-solving could qualify for R&D tax relief.
What are qualifying R&D costs?
Under HMRC’s classification, qualifying R&D costs are incurred when a firm makes an advancement in science or technology over and above existing capabilities. This could be either a new procedure, product or service, or an improvement on an existing one. To produce this advance, HMRC require that the R&D is undertaken to provide a resolution to an issue or uncertainty that could not easily be resolved.
For example, some firms are immersed in activities that are beyond the boundaries of traditional architecture or advancements focused on limiting carbon emissions from construction activities. Such actions, normally needing substantial investment in innovative studies or technology, may be eligible as R&D expenses.
Who can claim R&D relief?
Firms seeking to claim R&D tax reliefs will fall under one of two arrangements – the Small or Medium-sized Enterprise (SME) scheme or the Research and Development Expenses Credit (RDEC) scheme. A firm with no more than 500 members of staff and either revenue of less than €100m or a balance sheet of under €86m a year, can be eligible for the SME scheme. Practices outside of these parameters can claim a Research and Development Expenses Credit.
How much can you claim?
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 most architectural firms, the salaries of staff working on R&D developments are likely to be their core expense, however, the pay of any subcontractors involved in developments and the expense of software and materials may also meet the requirements.
Record-keeping during all phases of a project is vital to a claim being successful. Timesheets should be kept assessing expenses and ensure that all eligible outlays are included. It’s also vital to have a good familiarity of any other grants and funding that the business has received, as this may make a difference to the category of tax credit that can be requested.
How can we help?
Looking for support from expert tax advisers can shorten the time it takes for firms to process an R&D tax claim. R&D tax specialists can also aid firms in creating a report, known as a ‘technical narrative’, to support their claim. This should include company background information, an explanation of how the eligibility conditions have been met and a comprehensive breakdown of the development expenses.
Overly aggressive claims can result in an unwanted HMRC examination, possibly leading to relief being denied. Therefore, firms should develop a clear understanding of the schemes’ eligibility conditions and progress their claims accordingly.
Firms should also be aware that LLPs are unable to claim R&D tax relief. However, there are usually commercial motives for having a limited company within the wider group structure and these companies could make claims if they incur qualifying expenses.
There are many architectural firms applying a problem-solving tactic in reply to construction-related problems. Many Firms are focussed on low-carbon resolutions, and therefore many businesses could qualify for R&D tax reliefs . Through understanding HMRC’s definitions of R&D actions and being supported by the correct expertise, firms can benefit from this relief.