A guide to R&D tax credits for architects

What is R&D tax relief - and how can your business reap its rewards?

Architecture shapes every day life more directly than most other disciplines.

Every building we experience has evolved through an iterative; often experimental process to achieve the perfect balance between function & experience.

Yet many firms are missing out on a government-led incentive which rewards the very thing most architectural practices are doing every single day: innovation.

In this post, Financial Consultant, Michael Holmes outlines what R&D tax relief is, why it matters to architecture and exactly how your business can take immediate action to reap its rewards.

What are R&D tax credits?

R&D tax credits are simply an allowance made by the government in order to incentivise companies to innovate.

Eligible businesses can reclaim up to 130% of the cost of R&D in tax credits; which is actually a very generous amount.

For most architects, this will result in significant reductions to corporation tax bills.

The UK government created this scheme with the intention of rewarding firms that carry out research and development for a very simple reason.

The UK is lagging behind countries like Germany & the U.S in terms of recorded R&D.

Recorded is the emphasised word here because it’s not that investment isn’t happening in the UK; it very much is.

It’s just that UK businesses are simply not claiming R&D in the same way as companies are doing in other leading countries. Particularly within the AEC industry.

So a lot of innovation that is currently taking place across the UK is simply not recorded by the government.

In fact, HMRC states that the amount that they budget for R&D tax credits is consistently under-claimed, year-on-year.

This can only really be attributed to a lack of awareness around what the British government views as research & development.

What is R&D?

There is a common misunderstanding that ‘research and development’ is strictly prohibited to those dressed in white lab coats, performing experiments under bright lights & microscopes.

That’s simply not the case.

For the purpose of R&D tax credits, the government is willing to accept a very broad definition of the terms ‘research’ & ‘development’.

Official documentation available on the .gov website defines R&D as 3 things:

• R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology.
• The activities which directly contribute to achieving this advance in science or technology; through the resolution of scientific or technological uncertainty are R&D.
• Certain qualifying indirect activities related to the project are also R&D.

So what does that mean for architecture firms & the wider built environment?

R&D in Architecture & the AEC Industry

In my experience, there are hardly any firms I know of that do not do R&D.

In fact, R&D is simply considered ‘business as usual’ by many architects. So it's easy to see how the connection between architecture, research & development could slip between the cracks.

But architecture is innovation. So it’s a shame to think that R&D tax relief isn’t more widely pursued by AEC firms in the UK. Which is why I'm writing this post.

The majority of architectural firms that I have seen pursue R&D tax claims have successfully reduced their corporation tax bill to 0.

For example, a client of mine was due to pay £50,000 in corporation tax this year & didn’t pay a penny. The previous year, they had paid £139,000 in corporation tax, which was refunded by HMRC, helping their cash flow.

I’ve even seen some firms receive cash rebates from HMRC because their tax credits ended up being substantially higher than their corporation tax.

Yet I meet with so many MD's & FD's who don’t realise their practice is eligible for this huge incentive until we tell them about it.

Examples of R&D in Architecture

So what qualifies as R&D in any given architecture studio?

• Do you develop modular prefabricates or produce off-site manufactured design?
• Do you use existing materials in a new/novel way?
• Do you use BIM, thermal modelling or wind modelling?
• Are you seeking BREEAM, LEED or Passivhaus?

These questions highlight some of the most common examples of R&D in architecture.

You can also download this document to view a more comprehensive list of Architectural R&D services.

If you answered yes to any of the questions listed here, then I would strongly recommend that you look into making a claim.

How to claim R&D tax credits

To make a claim, the first thing to do is seek professional advice. Your accountant should be able to provide you with some high quality recommendations.

A simple Google search for R&D tax credit consultancies for architects will also surface hundreds of UK-based companies specialising in this service.

But beware, not all consultancies will provide the same level of service, so seek recommendations where possible.

Professional advice is not free, so this isn’t a free lunch.

The majority of firms offering this service will charge roughly 20-25% on a commission-only basis. Meaning you only pay if your claim is successful. Your accountant should be able assist you with negotiating the fee.

The process of putting together a claim will require some time & effort on your part to identify specific examples of project delivery which qualify as valid R & D.

This usually takes a couple of weeks, but will be fully supported by your chosen R&D tax relief consultancy.

It's worth bearing in mind, completed projects that took place in the previous 2 financial years should also be looked at because claims can be made retrospectively.

What is allowable when claiming R&D tax relief?

You’ve sought professional advice; the experts have assessed your projects and support the basis for your claim.

Which is great; you’re doing research & development, so you can start considering what your business is entitled to.

So what business costs can you claim back through R&D tax credits?

• Any salary costs where time is spent doing the work
• Any employer national insurance or pension attributed to that salary cost
• Overheads such as power, utilities & rent
• Computer software licenses used to support R&D – i.e. BIM licenses

With each of these expenses, you are entitled to claim the % of the cost attributed to R&D.

If 30% of your time is spent on R&D, then 30% of your software license or overhead costs are allowable.

To summarise

Many architectural firms are missing out on a highly beneficial government scheme, which could significantly reduce their corporation tax bill.

Don’t be one of them.

Download the checklist; if you answer yes to one or more of those questions, then you could be entitled to make an R&D claim.

If you believe you could be eligible for this scheme, seek professional advice. The experts will perform the vast majority of the legwork for you & will make the claim on your behalf.

Good luck! If this post has inspired you to look into the scheme & make a claim; do let us know how you get along.

About the author

Auria Accountancy Limited is a well-established firm of Chartered Accountants in London's West-End, working primarily with architectural firms & professional services businesses in the creative sectors.

Michael Holmes has a 30-year career as an accountant in professional services firms, including 15 years as the Finance Director of CMap client Grimshaw Architects. His wealth of experience advising & supporting small-to medium-sized Architectural businesses is greatly supported by a deep understanding of the issues & challenges affecting them.

If you'd like further information regarding this subject, please get in touch.

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