Many of these developments, such as Liverpool Waters and Spinningfields site in Manchester are overseen by a central investor/developer, however in many cases much of the actual development is undertaken by small and medium sized corporate developers and sub-contractors building one or two blocks or units within the larger development or supporting the build process.
Property development is a series of processes which have been honed and professionally represented into best practice over a number of years. In many cases property development undertaken on industrial brown field sites, listed buildings and protected sites will, by their nature, require differing degrees of scientific and technological innovation to overcome the inherent challenges of the specific geological conditions. This could be the neutralisation of dangerous chemicals in the ground and surrounding areas or the construction of suitable foundations in soft ground conditions. These activities will therefore be specific to the site and conditions and may not be directly interchangeable between developments in different areas and conditions. In some cases, it may not even be interchangeable within the same development due to the differing proximity of water or geological features.
Along with the inherent uncertainties related to the geology and ground conditions of larger developments on brown field, protected and contaminated sites, there are also smaller and bespoke property development activities which require scientific and technological advances to overcome the uncertainties or advance the overall knowledge or capability in the field. Consider for example, installation of new products and fittings into listed buildings, such as bathrooms and kitchens. Also, window designs which meet the conditions of the listed status whilst exceeding the requirements of heat retention, development of underfloor heating systems which meet or exceed building regulations but limit the amount of excavation and development of roofing materials and processes which make an appreciable improvement on the existing ones in a new way, but all have uncertainties.
Those companies supporting property developers may also be undertaking R&D activities, such as:
- electrical engineers developing innovative fire and safety monitoring systems or reduced energy heating systems
- architects developing new or much improved fire protection cladding and systems which will be incorporated into the building
- engineers developing bespoke cranes and lifting systems for use and ultimately integrated into the in the build.
As noted previously, large companies may be involved in the wider development, however this does not always completely negate small and medium size companies claiming R&D Tax Relief on qualifying activities they have undertaken directly or as a sub-contractor.
With this in mind, it may be useful to understand the scope and value of the two R&D tax schemes available to SME UK companies undertaking research and development on renewable energy schemes, both directly (SME Scheme), or as a sub-contractor to a large company (RDEC Scheme).
Small or Medium Size Enterprise (SME) undertaking the research and development itself
An SME undertaking qualifying research and development themselves, may be able to claim an additional 130% deduction (SME scheme) on top of the qualifying R&D expenditure deduction. Therefore, for each £1,000 spent on R&D activities they would be due a further deduction of £1,300 against their profits, which ultimately would equate to a corporation tax saving of approximately £247 in addition to the standard corporation tax saving of £190, if the company was profit making.
Alternatively, if £1,000 was spent on qualifying R&D activities and the company was loss making in the year of the claim, they could claim a repayable tax credit of up to £333 via the surrender of the R&D related losses (subject to the overall value of the loss).
Small or Medium Size Enterprise (SME) undertaking sub-contracted qualifying research and development on behalf of a large company
If an SME was sub-contracted to undertake qualifying research and development activities on behalf of a large company, they may be able to claim a Research and Development Expenditure Credit (RDEC scheme) on the qualifying R&D expenditure as the sub-contractor.
If this is the case, for each £1,000 spent on qualifying R&D activities by the SME, they would receive a tax credit of approx. £105 (based on the current tax rates) as well as the standard corporate tax saving of £190.
Large Company* undertaking qualifying research and activities
If a large company undertakes qualifying R&D activities themselves, they would receive an above the line (ATL) Research and Development Expenditure Credit (RDEC) equal to 13% of the R&D spend, less Corporation Tax at 19%. Therefore, for each £1,000 spent on qualifying R&D activities by a large company would receive a net tax credit of approx. £105 (based on current tax rates) plus the standard corporate tax saving of £190.
As a note for the future, the government plans to introduce a PAYE based cap on payable tax credits arising on SME R&D claims from 1 April 2021, which will limit the amount of tax credit that can be immediately repaid from any claim made by a loss-making Company. In light of the current uncertainties in the UK economy arising from both the global pandemic and the possible effects of Brexit, we will wait to see if this revision to the R&D system is implemented or delayed again.
The next step
If you would like to discuss this article in relation to your own situation, please feel free to contact Lee Pimlett or speak to your usual UHY adviser.