Holding the key?
Gareth Randle discusses why embracing technological change and Research and Development(R&D) tax relief could be necessary for survival in the wake of Covid-19
The past couple of years have been relentless in their ability to present new and unexpected challenges. For businesses operating within the construction sector, it’s been a particularly tough time.
The sector has faced huge challenges in the wake of Covid-19, with closed or paused sites, social distancing, and reduced investment all contributing towards a rather bleak outlook. In fact, while the sector fared slightly better than hospitality or retail, one report estimated that the UK construction industry was losing over £300m worth of business a day when the pandemic first peaked in April 2020 – and things are only starting to pick up again now.
Of course, the challenges posed by the outbreak have been compounded by Brexit, which caused mass disruption to supply chains and recruiting labour, and the introduction of two controversial government tax policies – IR35 and the reverse VAT charge.
As pressures increase and margins tighten, conversations about aiding recovery and setting out future plans are critical. It’s therefore high time for decision makers to reconsider their attitudes towards investment, innovation and digital transformation if they’re to survive.
As one of the largest sectors in the UK, the construction sector has been historically slower to adopt digital transformation. However, Covid-19 has now forced the issue, and kick-started the process of digital transformation for everyone to some degree. As a result, a number of businesses are now seeing the benefit of embracing technological change – whether that be in driving efficiencies, cutting costs or redeploying resources – both for now and in the future.
Of course, digital transformation also represents a significant investment in terms of time and money, and businesses will have to weigh up the uncertainties presented by Covid, Brexit and tax changes within the sector, against the benefits of adopting digital transformation and the potential ramifications for the business if they fail to do so.
It’s a big decision to make, but now is the time to actively seek future resilience. Investment could divide those that recover quickly from those who struggle in the years to come. After all, many businesses were already embracing digitalisation opportunities before the pandemic, and others have heavily invested since to try and catch up.
Don’t let R&D pass you by
While the decision to embrace technological change is a critical one, it needn’t be a hard one.
The Government’s Research and Development (R&D) tax relief incentive recognises investment in innovation and could feasibly help construction businesses to not only fund digitalisation projects, but also ease the financial burden caused by IR35 and the reverse VAT charge.
Better yet, as Covid has forced every business to adapt in some way, there’s a real opportunity for businesses to revisit the incentive if they didn’t qualify previously, or reap the rewards from reactive measures that qualify for tax relief.
While awareness of R&D tax relief in the construction sector has grown year-on-year, many businesses still aren’t using the relief to their best advantage. For example, investment into digitisation should be made in the knowledge that opportunities for R&D tax relief broaden once a company’s digital transformation is achieved. This way, R&D tax relief can be used more strategically, forward-funding the innovation that businesses require to aid their recovery.
Looking at IR35, which could feasibly discourage contract labour, R&D can indirectly help here too. Although the government has suggested that businesses could simply employ these workers, the contract workforce has historically enabled businesses to adjust labour capabilities to meet project demand – and the ability to do so will be essential as margins continue to tighten.
While a traditional construction workforce tends to be intensive on-site, the introduction of modern methods of construction (MMC) reduces the need for this, as more time is spent in the highly-skilled design development and fabrication phases. Herein lies a tangible, and eligible, R&D opportunity.
It’s important to remember that not everyone has been reticent to change. Over time we’ve started to see distinct types of private business operate within the sector. Firstly, crisis-resilient digitised consulting firms and large contractors that are already claiming strategically using R&D tax relief; and secondly, the traditional contractors who are typically more risk averse and need to re-evaluate innovation and R&D the most.
There’s been notable progress in public works projects and programmes too. The Government actively mandated the implementation of digital transformation and MMC in its Construction Playbook, which also championed the UK Building Information Management (BIM) Framework. Larger private projects are regularly BIM-mandated during inception, and that will soon become the norm as clients and regulatory bodies become aware of the enormous benefits, which will force businesses to take the first step or risk falling even further behind.
It’s easy for decision makers to let the opportunity of R&D tax relief pass them by. But, like digital transformation, you should view R&D tax relief as an investment into the business’ future funding. If you aren’t incorporating this into your business strategy, you can bet that many of your competitors are.
Build a better future
In the wake of the perfect storm created by Covid-19, Brexit, and the resulting economic downturn, construction firms have a real opportunity to plot their path for the future – and R&D tax relief could offer generous funding should they decide to embrace the opportunities that digital transformation can offer.
In the not-so-distant future, the sector truly could be two-tiered – made up of those with the technological capability to deal with the digital project demands of the future, such as BIM and MMC, and those that are strictly low-tech artisanal builders. As a result, construction businesses will need to decide which side of the sector they’d prefer to sit.
Regardless of their decision, one thing is clear. If businesses are to survive any potential challenges ahead, they must be both adaptable and strategic.
Gareth Randle is an engineering sector specialist at ForrestBrown, the UK’s premier R&D tax relief consultancy. Gareth has 20 years’ experience as a structural engineer, and at ForrestBrown he supports its R&D tax relief practice and clients with his extensive technical knowledge. The multi-disciplinary team at ForrestBrown offers unmatched technical expertise and are passionate about helping innovative businesses grow. The business was named ‘best independent consultancy firm’ at The Taxation Awards 2018 and since inception has delivered over £500 million for its clients.
For more information please see: https://forrestbrown.co.uk/