Capitalising on R&D Tax Relief in the Construction Sector

The construction industry is no stranger to complexity when it comes to tax. From the Construction Industry Training Board (CITB) Levy to the Construction Industry Scheme (CIS) and VAT, contractors face a growing administrative burden, which if not met, could result in thousands of pounds of fines. The schemes are intricate and inconsistent, and they can place significant strain on both time and cash flow. 

Ed Baldwin, R&D Technical Senior Manager at Ryan, spent 13 years working in the construction industry, and he heralds the Research & Development (R&D) tax credits scheme for offering companies that can demonstrate technological advances an avenue to reduce their tax burden. This tax relief aims to support companies taking a financial risk by driving scientific and technological innovation. Ed reveals what construction firms need to know about claiming relief.

Q: What Is the Construction Training Board Levy (CITB)?

A: The construction levy, formerly known as the CITB Levy, is a statutory charge imposed on construction companies by CITB, a non-departmental public body (NDPB) under the UK government that is intended to fund industry training and skills development. It applies to businesses where more than half of their workforce's time is spent on construction activities, including both PAYE employees and CIS subcontractors. Levy rates are 0.35% for PAYE payroll and 1.25% for net CIS payments for the 2025 assessment, and the total levy collected totals more than £200 million annually. While CITB ostensibly collects this statutory charge to address the skills shortage in the construction industry, as of March 2024, the quango was holding more than £95 million of construction firms’ cash, more than double its £40 million policy floor.

Q: What Is the Construction Industry Scheme (CIS)?

A: The Construction Industry Scheme (CIS) functions like a withholding tax that is deducted directly from contractors’ payments as an advance on their CIS tax rate of either 20% or 30% depending on registration status. Firms can apply for 0% “gross” status if they meet turnover and compliance thresholds; however, this brings an administrative burden with status checks and meticulous record-keeping throughout the supply chain to validate.

While the scheme was implemented with the important objective of increasing compliance, for firms too small to qualify for “gross” status, the reality is that vital cash that could otherwise be used to fund operations instead goes directly to His Majesty’s Revenue and Customs (HMRC) regardless of accounting period.

Q: How Do Tax Regimes Like CITB and CIS Impact Construction Firms?

A: The schemes significantly affect the relationship between contractor and taxes, often creating cash flow challenges and administrative burdens. In leaving contracting to join Ryan, one lesson stuck with me: construction firms are subject to too many taxes, regimes, and schemes. Critics across the industry argue that the CITB Levy does not return value equal to the levy, and the £95 million cash hoard reported in their Annual Report in December 2024 does little to counter this.

CIS adds risk to contractors while withholding cash from subcontractors—cash that small businesses in other sectors would be able to leverage through the year. The aim of increasing compliance is laudable, but the cost of tax is not just in the value of the cash surrendered to the exchequer; it’s also in the administrative burden of running these schemes. CIS is overcomplicated and riddled with obscure rules; for example, laying linoleum flooring on a construction site is subject to CIS, while laying carpet is not. Firms risk harsh penalties for any administrative errors in checking and maintaining the CIS status of their supply chain, so even good-faith mistakes in record-keeping might be met with thousands of pounds in fines. Subcontractors who have had too much tax withheld may be eligible to claim a CIS refund from HMRC, though the process can be time-consuming and complex.

Q: What Makes VAT So Difficult to Navigate for Construction Firms?

A: The intricate framework of zero and reduced rates under VAT Notice 708 butting up against the (relatively) new reverse charge mechanism creates further uncertainty in the sector. Woe betide any contractor in the industry who has not fully understood all 38,000 words of VAT Notice 708; have you apportioned a fair and reasonable amount of your substructure in a mixed-use residential and commercial block, and has your entire supply chain understood this well enough to correctly detail the reverse charge on their invoices? Precisely how close to the party wall do you need to demolish to qualify a building as “new”? These questions and many more are left to contractors to interpret and apply, meaning extensive record-keeping and an ongoing risk of penalties if any error has been made.

Q: What Makes R&D Tax Relief Different from Other Schemes Like CITB and CIS?

A: In contrast to these outdated schemes, the R&D tax credits scheme rewards companies for investing in innovation, a crucial ingredient in a sector that is continually required to do more with less. The evolving regulatory landscape pushes ever-greater requirements for performance and efficiency onto new buildings while clients continue to seek maximum return on their investments. In an industry where risk is high, margins are tight, and cash is king, the R&D tax scheme can offer firms much-needed relief from the burden of being overtaxed. Businesses that commit to developing new methods, materials, and technologies can be rewarded for moving the industry forward.

Q: What Kind of Construction Work Qualifies for R&D Tax Credits?

A: Activities must be linked to a field in science or technology, such as structural engineering, build methodologies, or material science; any such activity that meets the R&D tax credit schemes’ key test of either a new or non-trivial improvement to process, product, material, device, or service could potentially qualify. If overcoming uncertainty through the development or implementation of a scientific or technological solution, like a new material, innovative temporary works, or a novel build methodology that couldn’t have been worked out by applying existing knowledge, products, or services without significant effort, there is likely an argument for alignment with the scheme. Construction firms in particular should know that HMRC can consider the resolution of “system uncertainty” a valid avenue for R&D; this pertains to the complexity of how a system and its individual components interact, which is a key challenge in the sector because of ever-changing product lines and the increasing requirements of building regulations and other sector-specific legislation.

Q: How Can Ryan Support Construction Firms with R&D Claims?

A: At Ryan, we have a team dedicated to R&D tax credits in the construction industry, staffed by experts who have worked in that industry. We understand the challenges construction companies face in today’s market. Because members of our team have worked beside you in the past, we speak your language. We work with you to understand the challenges of your projects, and we can quickly identify where problem solving becomes innovation and which elements of your project can qualify for R&D tax relief, freeing your capital to invest, grow, and thrive.