Planned merger of R&D schemes could remove construction innovation incentive

UK research and development (R&D) is about to suffer a major setback. The government has shared an outline of new draft legislation on the proposed merging of the two existing R&D schemes and, while in principle the idea is sound, the industry has some major concerns.

For context, there are currently two separate schemes – one for large businesses and one for small and medium enterprises – which operate very differently both in terms of how they provide relief and with regard to what can be claimed. For example, the accounting treatment varies between both schemes, as does the credit cap and the inclusion of certain costs.

Benjamin Craig is associate director for R&D tax at innovation consultancy Ayming UK

While on the surface, the government’s decision to merge the two schemes represents a welcome simplification of the system, hidden under the radar, there’s a concerning barrier, which will significantly dampen the innovation potential of the UK’s economy.

Under the current Research & Development Expenditure Credit (RDEC) scheme, designed for large businesses, it is irrelevant whether R&D has been subcontracted to a claimant, meaning that R&D undertaken in fulfilment of a contract is eligible for tax relief.

However, the new rules could prevent claims for subcontracted R&D, meaning the companies that are doing the R&D won’t be eligible to receive the funding for it. Instead, the companies that commission the R&D will. The equivalent clause in the current scheme for small and medium enterprises is already causing headaches due to HMRC’s interpretation of what subcontracting means.

Although it sounds sensible, it will raise massive problems for subcontractors. The construction industry presents a useful example. If a hotel chain commissions a construction firm to build an innovative, sustainable new building for which it has to develop cutting-edge technologies and materials – the construction firm actually doing the R&D won’t be able to access the funding. Instead, only the hotel, which hasn’t had anything to do with the innovation efforts can apply for credits. And they often won’t claim due to a lack of technical expertise in what R&D has been carried out. Surely a well design R&D incentive shouldn’t reward a hotel for innovation in civil engineering over a construction firm.

The benefits of merging the schemes are clear – one unified scheme would make it easier to claim and administer. However, the disadvantages are hugely problematic and are currently being overlooked.

R&D tax relief represents essential funding for major firms, especially those in construction who are relied upon to deliver the buildings and infrastructure the UK needs to thrive. The relative stability of the R&D schemes until now has been a huge driver for increased innovation in the construction sector. As it stands, the proposed changes will see the R&D incentive for the UK’s construction industry bulldozed.

The purpose of the scheme is to incentivise greater levels of innovation – spurred by ambitious businesses that reap the benefits of the effort they put into R&D. Take that immediate benefit away and the incentive is dangerously eroded. If they go ahead, the proposals will leave many businesses without funding, which can only be a bad thing for the UK economy.