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Construction industry missing out on billions in R&D tax credits

I find it difficult to say just how much I disagree with the Farmer Review’s attack on construction’s lack of innovation.

Every day on sites up and down the country, contractors and consulting engineers are doing things that have never been done before.

“Large construction companies can receive up to 8.8 per cent of the money they spend on R&D back from HMRC”

Whether it is complex geotechnical engineering on Crossrail, or designing a housing site near a flood plain, at every level the construction industry comes up with fresh solutions.

The problem isn’t that we as an industry aren’t innovative – we are. The problem is that we don’t think of ourselves as innovative. Nowhere is this skewed perception of what we do as an industry shown more clearly than in the pitiful sums claimed by construction firms through HMRC’s R&D Tax Credit scheme.

Failure to claim

As the Farmer Review rightly points out, only 480 construction companies – out of an industry of 290,000 firms – took advantage of the R&D Tax Credit Scheme in 2014/15. Despite generating revenues of more than £145bn each year, the construction industry has, in total, only claimed £35m via the scheme.

However, rather than this being, as the Farmer Review claims, an indication of construction’s lack of innovation, it is simply showing the industry’s inability to claim the billion-pound opportunity in front of it.

The R&D Tax Credit Scheme is a government incentive designed to encourage the growth of research and innovation in UK industries aimed at improving productivity. Large construction companies can receive up to 8.8 per cent of the money they spend on R&D back from HMRC, while SMEs can receive up to a third.

Unrecognised R&D

Unfortunately, most people think that ‘real R&D’ is carried out in laboratories by people in white coats. But whether you’re overcoming specific ground conditions, adapting equipment, creating new processes or developing better, safer or greener methods of construction, you are almost certainly undertaking R&D.

And HMRC agrees. With one of our clients we have been able to recover £664,000 over the past three years – pretty astounding given that the average annual R&D Tax Credit claim from the construction industry has been £52,000 over that period.

Even if innovation accounted for just 1 per cent of UK construction’s turnover – and our work with clients has shown it is typically several times this – then for an industry worth more than £145bn a year, that is potentially more than £1bn in R&D Tax Credit claims that could be made by construction every year.

If the industry claimed the appropriate level of credits for the innovative work it is already doing, this could unlock a huge wall of cash to further invest in innovation that the Farmer Review calls for.

Tim Fitch is director of construction business consultancy Invennt

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