R&D in construction, for tax purposes, is a project that seeks an advance in a field of science or technology by resolving scientific or technological uncertainty. [1] The advance has to be in overall knowledge or capability in a field of science or technology, not a company's own state of knowledge or capability alone. [2] Design work counts as R&D when achieving design objectives requires the resolution of scientific or technological uncertainty within the project.
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What is R&D in construction?
For tax purposes, R&D in construction is a project that seeks an advance in a field of science or technology by resolving scientific or technological uncertainty. [1] The project must aim to create an advance in the overall field, not just for the construction business carrying out the work.
The scheme as a whole is explained on the R&D tax credits page. The money side is covered in how R&D tax credits are calculated.
What is R&D in the UK for tax purposes?
R&D is defined for tax purposes in Section 1006 Income Tax Act 2007, and the definition follows generally accepted accounting practice, modified for tax purposes by guidelines given legal force by Parliamentary Regulations. An advance in science or technology means an advance in overall knowledge or capability in a field of science or technology, not a company's own state of knowledge or capability alone. [2]
Science is the systematic study of the nature and behaviour of the physical and material universe, and technology is the practical application of scientific principles or knowledge. From 1 April 2023, mathematical advances can be treated as science for these purposes, whether or not they are advances in representing the nature and behaviour of the physical and material universe. An advance sought in the arts, humanities or social sciences, including economics, cannot be claimed.
Only companies chargeable to UK Corporation Tax can qualify for this relief. A process, product or service can still be an advance if it has been developed by another company but is not publicly known or available. Timing and notification are covered in our guide to claiming R&D tax credits for earlier years.
What is R&D design on a building project?
When achieving design objectives requires the resolution of scientific or technological uncertainty within a project, work to do this will be R&D. Design activities which do not directly contribute to the resolution of scientific or technological uncertainty within a project are not R&D.
Work to create a desired cosmetic or aesthetic effect through the application of science or technology can require a scientific or technological advance, and resolving the uncertainty associated with such a project would be R&D. That could be relevant where an architectural finish depends on technical work rather than a choice of style.
Improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty.
Which building improvements could count as an advance?
An advance may have physical consequences or may be an increase in overall knowledge, and in either case a competent professional working in that field would recognise it as an appreciable improvement. Appreciable improvement means changing or adapting the scientific or technological characteristics of something to the point where it is better than the original.
The improvements may include creating a process, material, device, product or service that increases overall knowledge or capability in a field of science or technology. They may also include appreciably improving an existing process, material, device, product or service, for example to save costs or reduce waste, where this is a genuine non-trivial improvement resulting in more than a minor or routine upgrade. Using science or technology to copy the effect of a current process, material, device, product or service in a new or improved way may also count.
For a construction firm, those headings could cover a new building material, a new construction process or a device developed for use on site.
Where construction R&D starts and stops
R&D starts when work begins to resolve the scientific or technological uncertainty and ends when that uncertainty is resolved, or the work to resolve it stops. [3] Costs are included only from the start to the end of the project, and costs that have not been paid before the claim is made are not eligible. [3]
The design, construction and testing of prototypes generally fall within the scope of R&D for tax purposes. The construction and operation of pilot plants while assessing their operations is R&D until the scientific or technological uncertainty associated with the intended advance has been resolved. A routine adjustment of an existing prototype, with no scientific or technological uncertainty, will not be R&D, while more substantial changes with scientific or technological uncertainty to resolve will be R&D. If flaws in a design become apparent later, work to remedy them would be R&D if a competent professional working in the field could not readily resolve them.
What counts is whether there is an intention to achieve an advance in science or technology, not whether the uncertainty is completely resolved, or resolved to the degree intended. Scientific or technological planning, such as defining technical objectives, assessing feasibility and identifying particular uncertainties, is R&D. Planning that examines a project's financial, marketing and legal aspects is not R&D.
Showing the technical uncertainty on a construction project
A scientific or technological uncertainty exists when an expert on the subject cannot say if something is technologically possible, or how it can be done, even after referring to all the available evidence. This means the company or experts in the field cannot already know about the advance or the way to solve it.
The company needs to explain the work it did to overcome the uncertainty, and a simple description of the successes and failures during the project can do this. It should explain why a professional could not easily work out the advance, for example by showing that other attempts to find a solution had failed. It can also show that the people working on the project are professionals in that field and have them explain the scientific or technological uncertainties involved.
On site, that could mean keeping notes of trials, failed approaches and the engineers' reasoning as the work goes on.
Sources
Rates, thresholds and dates in this guide come from these sources. Check the source for the current figure.