Blueprints for innovation: R&D for UK architecture firms
As an innovative architecture business, you will be affected by the changes to research and development (R&D) tax legislation. Recently, the government published draft legislation setting out important changes to R&D tax incentives. Some have already been introduced for accounting periods beginning on or after 1 April 2023 and some will be introduced on a pro-rata basis.
The legislation includes changes to the net tax benefit of both the R&D expenditure credit scheme (RDEC) and the Small and Medium-sized Enterprises (SME) R&D tax relief scheme.
Here, we explore the changes to the R&D tax landscape and how they may affect your architecture firm, as well as focusing on common issues that architecture firms face with their R&D claims.
Architecture R&D that qualifies for tax relief
R&D for tax purposes takes place when a project seeks to achieve an advance in the overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainties.
For architecture firms, this could involve:
1. Developing new or improved products, processes, or prototypes: designing and building new products, improving existing ones, or developing new or improved processes to make products more efficiently or sustainably.
2. Developing new construction methods: developing new or enhanced methods of construction, such as modular construction or 3D printing, which require specialist knowledge and expertise in architecture.
3. Software development: developing new design software, such as using advanced automation or artificial intelligence, or making significant improvements to existing software that involves overcoming technical challenges or uncertainty.
4. Developing new materials: developing new building materials or improving existing materials to make them more energy-efficient or sustainable that involve significant technical challenges and uncertainty.
5. Developing new or improved systems or technologies: developing new or improved systems or technologies that require overcoming technical challenges or uncertainty, such as HVAC or lighting systems that are more energy-efficient or environmentally friendly.
Any costs incurred can qualify if they meet the criteria set out by the Department for Business, Energy and Industrial Strategy.
Subsidised and subcontracted R&D
Subsidised R&D
If your R&D is subsidised, it may affect your eligibility to claim tax relief. “Subsidised” means that the cost of the product or service has been partially or fully covered, either directly or indirectly, by funding such as grants, tax breaks or direct payments. Be aware of this when considering claiming under the SME scheme.
Subcontracted R&D
If your architecture firm conducts R&D work, bears the financial risk of development and owns the resulting IP, you may be eligible to claim under the SME scheme. However, if you carry out R&D work on behalf of your client, this could be seen as subcontracting. In this case, you are only able submit the claim under the RDEC scheme if the company that hired you as a subcontractor is considered a large company. If the hiring company is considered an SME, you will not be able to submit a claim.
Difference in claiming under SME and RDEC schemes
RDEC generates less for the claimant than SME currently but for claims submitted after 1 April 2023 the gap between claiming RDEC and SME reduces.
Subcontractor fees cannot be claimed under the RDEC scheme.
Follow this link to see the SME and RDEC rates
Enhanced R&D support rates
On 1 April 2023, the government rolled out a higher R&D tax relief rate to bolster loss-making, R&D-intensive SMEs that commit at least 40% of their total expenditure to qualifying R&D initiatives. The result is an effective benefit of 27% for qualifying SMEs, compared with 19% for others from 1 April this year.
Eligible companies can claim this extra support as part of their SME credit for expenses in periods beginning on or after 1 April 2023. Claims for the higher rate can’t be filed until 1 August 2023, so companies can either wait or file at the lower rate, amending their return for additional relief later.
It is worth noting overseas expenditure will not be allowable after 1 April 2024.
Expert R&D help
Our specialist team of scientists, engineers and tax advisers not only identify activities that qualify as R&D, but also consider broader tax implications. Additionally, the team knows how best to present your figures to HMRC to maximise your R&D tax relief, as well as guide you through legislative changes. Contact us for an initial no-obligation discussion.
In 2023, new requirements regarding documenting claims have been published alongside pre notification and its procedure. As and when further details are released, we will provide guidance on it. Subscribe to our mailing list to receive future insights and updates.