Specialist tax relief advisors Catax hosted the final Offsite Roundtable of 2019, which explored the challenges associated with the offsite industry’s limited exposure to Research & Development (R&D) tax incentives.
As market leaders, Catax offer tax relief advice to start-ups and SMEs operating in the offsite sector. Tax relief is awarded to businesses that invest in a wide range of innovation including the reduction of CO2 emissions, as well as the use of pioneering materials, the development of sophisticated software and ground-breaking manufacturing techniques. As the offsite industry continues to drive advancements in the construction industry, the sector is still not utilising tax relief benefits to maximise product and process development opportunities.
Hosted by Head of R&D for Catax, Nigel Holmes and Regional Business Manager, Chris Jones – the roundtable guests included Joanne Booth, Business Manager at Lucideon, Ben Towe, Group Managing Director at Hadley Group, Professor Mohammed Arif, Head of the School of Architecture at the University of Wolverhampton, Matt Hallissey, Head of Strategy at Top Hat and facilitated by Darren Richards, Managing Director at Cogent Consulting.
Under-Claimed Tax Relief
Research and development programmes are seen as expensive because of the iterative processes involved. With first time success uncommon, the ongoing trials and testing can be financially straining. Therefore, it is vital that HMRC has a tax relief system in place to alleviate financial burdens. But the number of offsite manufacturers that are accessing the R&D tax relief scheme and support mechanisms is unusually low. Communications and marketing campaigns around the benefits of R&D tax relief need to be improved so that construction companies know what it is, where it is and how to access it.
HMRC conclude that out of 800,000 qualifying companies in the UK, only 52,000 submitted claims in 2016-17. That leaves around 750,000 companies that did not access the benefits of R&D tax relief across all sectors. Out of the 52,000 companies that applied for tax relief, construction and ancillary services only made up 2,260 of the claims – including SMEs and large companies. This generated £145 million in tax savings. The result it seems, is that R&D tax relief is worthwhile yet vastly under-claimed in the offsite industry.
Catax’s Head of R&D, Nigel Holmes, recommended that companies consider R&D as a form of finance instead of tax relief, because it is ultimately designed to improve cash flow for both profitable and loss-making companies. This way, it is more likely to get offsite manufacturers talking about and claiming for the relief. Even the term ‘tax relief’ misleadingly suggests reduced tax bills – in reality the term refers to transferring real funding into bank accounts.
The statistics show that the scheme is only effective for engaged companies who know it exists. But HMRC is not communicating the opportunities that are available. It is up to accountants and specialists – such as Catax – to raise awareness of the system and the benefits that can be gained.
However, Nigel Holmes raised concerns that with many accountants not experts in R&D tax relief, they do not have the necessary information to pass on to their clients. Accountants appear to be unwilling to risk their professional indemnity in offering specialist advice that is not within their area of expertise. As Nigel Holmes says: “You don’t go to a GP for brain surgery, you go to a specialist. Just like you wouldn’t use your residential conveyancer for some complex employment law – offsite professionals need to understand that this is a specialist area and that they need to use a specialist.”
Cogent Consulting’s Darren Richards noted that although the government did run a marketing campaign to promote R&D tax incentives a few years ago, there is still little evidence that this had any impact. But there is an incentive for the government to demonstrate the scheme’s effectiveness and entice other territories around the world through R&D that the UK is an attractive nation to invest in. However, HMRC is too government-focused to be the right organisation to take on this marketing. There seems to be a clear need to improve awareness and advice for accountants. Nigel Holmes also suggested the possibility of an R&D checklist or simple template/guide for accountants to identify whether the tax relief is a viable option for offsite manufacturer clients.
R&D Tax Relief Legislation
Chris Jones, Catax’s Regional Business Manager, explained that R&D tax relief claims fall into one of four categories:
• Increasing in the overall knowledge within a specific sector
• Creating new products, processes, services, materials or devices
• Improving existing products, processes, service materials or devices
• Duplicating in a new and innovative way the effectiveness of products, processes, services, materials or devices.
It is important to remember that there are slight differences between the SME R&D tax relief scheme and the Research And Development Expenditure Credit (RDEC) scheme for larger companies. The SME R&D scheme takes a company’s R&D costs and offers an extra 130% of relief. This means that a loss-making company will give up a bigger loss for cash, while a profitable company will have a substantially reduced tax bill. Meanwhile, the RDEC scheme creates a taxable form of income that is deducted from a company’s tax bill. This provides approximately 10% extra relief. This should not change post-Brexit.
The legislative mechanics are solid – the problem is in the branding and positioning. R&D tax relief is intended to be an enabler, but as Darren Richards, Managing Director, of Cogent Consulting explained, all too often, companies don’t consider R&D tax relief until project completion. When R&D is evaluated post-event, it is difficult to track the entire product/system journey.
Ben Towe, Hadley Group’s Managing Director said: “In the eyes of HMRC, a project needs a start and end date. Everything in between is potentially claimable. There is a huge amount of workflow that can be rewarded. This is why it is vital that we bring R&D tax relief to the front of dialogue – it requires advance planning and should not be an afterthought.” Manufacturers need to assume that all of their work around R&D is claimable, as only a small percentage is not.
Ben Towe also raised an issue around the lesser R&D funding opportunities for larger offsite companies that are looking to grow. Perhaps, regardless of company size, the government should support the drive in innovation and construction to benefit all UK PLCs. In the offsite industry, this will improve solutions to the housing crisis and other large-scale issues that we will likely rely on larger players to overcome.
Ben concluded that: “If we want to genuinely innovate and disrupt our existing traditional methods of construction, then the government needs to encourage that kind of behaviour at all levels.” Additionally, in order to show behaviours that the offsite industry needs, HMRC needs to adopt a project perspective. It is important to consider the whole supply chain, not just the manufacturer – as such HMRC needs to recognise and respect the project perspective, not just the set of accounts.
Embracing Collaboration
Lack of standardisation is at the core of many issues as competitors believe in different responses as the best solutions. As Ben Towe said: “It’s all about how we can align commercial interests using the same components to achieve a variety of end results. Innovative manufacturers are all producing different systems, which is why R&D tax relief is so well-placed in the offsite industry.” One example of this is the Seismic Initiative – comprising construction consultants blacc, the Manufacturing Technology Centre (MTC), Bryden Wood and two of the UK’s leading offsite manufacturers, Elliott and the McAvoy Group. This was instigated by a government initiative that demanded standardisation of classrooms and funded the R&D. This meant that all framework manufacturers produced modules that fit together, using the same technology.
Matt Hallissey, Head of Strategy at Top Hat highlighted the importance of BIM at this point saying: “If more suppliers ensure that their suites of products are BIM-compatible to support offsite construction, there will be more incentive to share R&D results in an open-source BIM platform, and technology will be shared more broadly.” The offsite industry tends to act when other innovators have pushed boundaries. This is where R&D case studies and project profiles can really push change and disruption in the offsite sector, as well as embrace collaboration and resonate with manufacturers. In a similar way, webinars can also increase knowledge share between professionals, perhaps explaining the check sheet for R&D tax relief eligibility.
Head of the University of Wolverhampton’s School of Architecture, Mohammed Arif, highlighted the importance of neutral bodies to promote such content. “While competitors are unlikely to share project profiles, case studies and webinars, neutral organisations such as universities can promote this material and reach wide audiences in doing so. Information could also usefully be shared across construction innovation platforms that generate high levels of traffic, such as Buildoffsite and the Offsite Hub.”
A criticism levelled at many offsite manufacturers – particularly volumetric modular providers – is that they tend to create modules/products that cannot easily fit with competitor modules/products, which in itself lowers level of productivity, reliability and trust within the offsite sector. In some respects this can be seen as reflective of an immature industry. Other fields – such as the automotive industry – offer massive commonality of components. But things are changing. “Within the last 12-18 months we have seen this kind of security enter the offsite industry,” says Darren Richards. “Companies are beginning to see that ‘the opportunity is so big and the pie is so massive’ we are getting a sense that we are starting to change our culture of construction and collaboration.” But what would be ideal is a stronger mechanism to encourage collaborative R&D with new methods to share knowledge and innovation between companies.
Though there will always be competitive tension – which is what creates innovation – there is a big role for trade associations to play in R&D collaboration. These bodies can bring members together in joint solutions, underlining the real competitor as traditional construction. The Light Steel Frame Association (LSFA) stands as a strong example: if all the light steel frame manufacturers in the UK gravitate towards universal solutions in the steel framing industry, they could establish highly collaborative R&D and universal solutions. There is definitely an emerging sense that it is better to pool resources and share R&D, but this requires more trade body encouragement from groups with voice, authority and strong market penetration.
Evolution of Testing
Following the legislation and building regulation changes around material specification and combustibility following the Grenfell disaster, many companies have needed to innovatively upgrade or modify their building products. As a result, there is a need to demystify accreditation bodies. In the offsite industry it is important to validate performance, though this can be challenging. Joanne Booth, Business Manager, Lucideon, reiterated the importance of test houses providing accurate, detailed information and guidance on this.
However, there is an issue around test house capacity. Few UK facilities test to the scale required to prove full volumetric modules and unitised facades. Instead, overseas bodies are offering certification. While trying to encourage R&D in the UK offsite industry, the infrastructure to validate and underwrite it is limited. As Joanne Booth highlighted, this is again linked to the challenge of a lack of standardisation.
As a result of the various communication issues surrounding R&D tax relief, the system needs to evolve to meet changing industry requirements, especially as there are so many challenges around growing the capacity of companies involved in assessment and certification. A boom in encouraging growth in capacity and throughput in validating accreditation processes is required. Currently, products are often outdated by the time they come to market because accreditation processes are so lengthy.
The Future
Over the last 11 years, the construction industry has failed to secure a sector deal under the government’s industrial strategy. 2019 was the first year where the industry has been granted a sector deal, totalling £172 million to enable more R&D. Though this is moderate, if a strong outcome from this funding can be proven, a higher deal can potentially be secured in the future. Looking to the future, the Midlands region could form a solid offsite base for knowledge sharing using this funding. As the region extends across the middle of the country, companies based there are in a prime position to supply in all four corners of the UK, alongside the huge skills base in the area.
The offsite industry is worth £16 billion annually, with a 30-35% year-on-year increase. It is a sector characterised by innovation and disruption but still not fully exploiting the huge financial incentives and opportunities available. It is clear that the long-term solutions to wider take-up of R&D tax credits and the R&D platforms that exist is to communicate better – certainly HMRC can help in this respect – and look to educate and promote on a wider basis across the construction industry as a whole.
Many thanks to Catax for hosting the Roundtable Event and thanks to all participants for their time and contributions to the discussion. For more information on Catax and specialist R&D tax relief advice services visit: www.catax.com. For more information on offsite related activity visit: www.offsitehub.co.uk. Interested in hosting an Offsite Roundtable event? Find out more at: www.offsite-roundtable.co.uk
