Construction industry – tax winners and losers
The construction sector faces a number of financial challenges in the current economic climate with certain tax issues which could both help and hinder.
Providing a much-needed boost to the sector is the continued availability of research and development (R&D) tax reliefs to help fund the ongoing advancement of technology. Despite such advances continuing at a staggering pace, these reliefs have been significantly under-claimed historically, with nearly a quarter of firms never having heard of them. A recent analysis of government statistics showed that only 0.2% of 290,000 successful claims were made by the construction industry.
R&D tax credits are government-backed but whether by complexity, length of time or the requirements to claim are largely ignored by the construction sector even though they could provide a huge financial benefit if claimed correctly.
R&D is defined as seeking advances in science or technology through the resolution of scientific or technological uncertainty. Such projects include the improvement of existing products, processes or services, as well as devising new ones. The relief is not just for ‘white coat’ scientific research, but also applies to all innovation to solve a unique problem.
Many companies overlook R&D relief as they are not aware that they are undertaking it, particularly if they are not involved in the technology sector.
Listed below are just some of the types of activities which could qualify:
- Development or adaptation of tools and materials to improve efficiency, or to adapt construction techniques to accommodate environmental or land conditions (such as construction to withstand weather conditions);
- Identification of technological improvements in the construction process or to the products and software used. This can include developing, testing and implementing systems which are technically difficult;
- Research and design, development of prototypes and commissioning (including quality testing and production of the prototype);
- Development of environmentally friendly methods or sustainable technology;
- Development of sophisticated systems to meet health and safety requirements, for example innovative scaffolding, safe working processes and automation.
The so-called ‘off-payroll’ changes to tax legislation from April 2020 could also have an impact on the sector. Currently engagers working in the private sector only have to be concerned whether a sole trader subcontractor falls into a potential employment relationship and is at risk of status challenge from HMRC.
From April certain engagers will also need to consider the status of a worker’s personal service company, or indeed a partnership, managed service company, or another entity providing the worker. The rules will apply to all companies that meet two or more of the following conditions:
- An annual turnover of more than £10.2m;
- A balance sheet total of more than £5.1m;
- More than 50 employees.
If the client makes the required status determination, and the off-payroll working rules apply, then the fee-payer is responsible for deducting tax and National Insurance (NI) and paying it to HMRC even if paying a partnership or limited company. The off-payroll changes taking precedence over HMRC’s CIS tax deduction scheme too, meaning that CIS deductions will not be made but tax and NI will be deducted instead.
These rules already apply to the public sector but from April 6, medium and large-sized private sector businesses also need to apply them with a risk of penalties for getting it wrong. This is yet another example where there is not enough awareness of the changes out there in the industry and potential issues could arise.
Getting the right advice is key
PKF Francis Clark has a dedicated team of construction and property accountants and advisers which provides advice to clients across the region on taxation, audit and strategic direction. Our team provides investors, developers, builders, subcontractors and property professionals with solutions to industry issues.
Author – Paul Bray, Partner, PKF Francis Clark, Bristol
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