CLC: Proposed R&D tax-credit changes ‘detrimental to construction’

The Construction Leadership Council (CLC) is urging the government to drop wording that it says would damage the construction sector from proposed legislation to reform R&D tax credits.

Between January and March this year, the government consulted on merging the Research and Development Expenditure Credit (RDEC) and the small and medium-sized enterprise (SME) R&D tax relief.

In July it published draft legislation for the changes to “keep open the option” of merging the schemes from April 2024.

The government says a merger would be “a significant opportunity for tax simplification, provide more clarity and certainty to SMEs, and help to drive innovation in the UK”.

But in a letter to chancellor Jeremy Hunt, CLC co-chair Mark Reynolds wrote that the plans would have a “detrimental effect” on the construction sector by directing a “large proportion” of its R&D tax credits towards its customers.

These would include “property developers, landowners, and other wealthy UK-based customers who may not be the performers or even the instigators of the R&D”.

The construction sector is “very concerned” about a section of the draft legislation that aims to stop tax credits being claimed on “activities having been ‘contracted’ to the claimant or deemed ‘subsidised’ by a customer”, Reynolds’ letter said.

In the response, sent in September, Reynolds said that this could lead to a scenario where “the contractor and others in the supply chain undertake the R&D activities as part of the build but the customer is awarded the tax credit”.

The letter said that the section “unfairly disadvantages the construction industry because, by its nature, construction is a service industry that only undertakes projects once work has been contracted to it”.

He concluded that the draft legislation is “set to severely damage the level of R&D investment across the construction industry thereby leading to job losses and reduced productivity”.

The CLC is calling on the government to amend the relevant section to make clear it refers to “subcontracting R&D activities” and remove the reference to “subsidised”.

The council is also urging officials to delay the merger plans to allow further consultation, and work with the industry to make sure the changes do not reduce R&D investment in the construction sector.

The letter explains that “clients often expect their construction contractors to lead on innovation and take the risk and the construction industry should not be denied the credit which encourages and rewards the risk-taking”.

According to Reynolds’ letter,  construction received £375m in R&D tax credits in 2020/21.

The government says it will take a decision on whether to merge the schemes at the “next fiscal event”.

Chancellor Jeremy Hunt’s Autumn Statement is due to be announced on 22 November.

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