From tax policy changes to Brexit and the fallout from COVID, businesses across the country have been hit by huge and numerous challenges in the last year. But there’s more to come yet; the introduction of IR35 and reverse VAT charge will do nothing to ease the financial burden placed on those operating in the construction and engineering sector. At a time when recovery and futureproofing is front-of-mind for so many, Gareth Randle, engineering sector specialist at R&D tax relief consultancy ForrestBrown, discusses why embracing technological change – and in turn tapping into R&D tax relief – could soon be necessary for survival.
The past twelve months have been relentless in their ability to present new and unexpected challenges to each and all of us. And for businesses operating within the construction sector, it’s been a particularly tough time.
The sector has – and continues to – face huge challenges in the wake of the COVID pandemic, 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.
Of course, the challenges posed by the outbreak have since been compounded by Brexit, which caused mass disruption to supply chains and recruiting labour. And now businesses are facing a further hurdle with the introduction of not one but two controversial government tax policies which could really hamper the sector – IR35 and the reverse VAT charge.
As pressures continue to increase and margins continue to be squeezed for construction businesses, conversations about aiding recovery and setting out a plan for the future couldn’t be more critical. It is therefore high time for decision makers to reconsider their attitudes towards investment, innovation and digital transformation if they’re to survive.
It’s time for change
While we’re by no means clear of COVID-19, we’re already noticing trends in how businesses are successfully responding to, and recovering from, the challenges the pandemic has posed. And one thing seems to be certain, technology holds the key.
As one of the largest sectors in the UK, but with a traditional reliance on human labour to keep projects moving forwards and a concern over risks, the construction sector has naturally been slower to adopt digital transformation.
That being said, COVID-19 has now forced the issue, and kick-started the process of digital transformation for everyone to a 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.
In a post-COVID world, the expectations we place upon businesses – such as health and safety or environmental measures – will only increase while income streams remain level, and construction firms will be left with a limited number of options if they’re to continue operating profitably. They will simply have to start innovating, and digitalisation presents a real opportunity for them to do so.
However, the initial process of digitisation to enable digitalisation 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 not an easy decision to make, but this investment really could be the divide between those that recover quickly and those who continue to struggle in the years to come. After all, there were many businesses which were already embracing the opportunities that digital technologies present to the sector before the pandemic, and others have heavily invested since to try and catch up.
Quite simply, now is the time to act – and if you aren’t prepared to meet the demands of the future sector, you face a very real risk that your business just might not survive.
How R&D can help
While the decision to embrace technological change is a critical one for construction businesses, it needn’t be a hard one.
The Government’s Research and Development (R&D) tax relief incentive, which was first introduced over two decades ago, recognises investment in innovation and could feasibly help construction businesses to not only fund digitalisation projects, but ease the financial burden they’ll soon be facing in the form of IR35 and the reverse VAT charge.
Better yet, as COVID has forced every business to adapt in some way during the last twelve months, 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 been growing year-on-year, many businesses still aren’t using the relief to their best advantage. For example, an investment in digitisation should be made in the knowledge that the scope for R&D tax relief becomes far broader once that digital transformation and competence is achieved. In this way, R&D tax relief can be used in a more strategic, forward-looking manner, funding the innovation that businesses need to undertake to aid their recovery.
And if you take a look at the impact of IR35, which is likely to discourage contract labour, as it will become more expensive, R&D can indirectly provide the answer here too. Although the government has suggested that businesses could simply employ these workers, the contract workforce has historically enabled businesses to dial up and down their labour capabilities to meet project demand – and the ability to do so will be essential for construction firms as margins continue to tighten.
While a traditional construction workforce tends to be intensive on-site, the innovative 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. And herein lies a tangible, and eligible, R&D opportunity.
It’s important to remember that not everyone has been reticent to change, and over time we’ve started to see distinct types of business operate within the sector. Firstly, crisis-resilient digitised consulting firms and large contractors that are already claiming R&D tax relief, and are planning to use it strategically to ease the cash flow burden; and secondly the more traditional contractors who are typically more risk averse – and who need to re-evaluate innovation and R&D the most.
There is also notable progress in public works projects, where digital transformation, and MMC, are actively being mandated in December 2020’s Construction Playbook, which addition champions the UK Building Information Management (BIM) Framework. Larger private projects are regularly BIM-mandated during inception, and that can be expected to become the norm as clients and regulatory bodies become aware of the enormous benefits, which will soon force businesses to take the first step or risk falling even further behind.
Given everything that businesses are facing right now, it’s all too easy for decision makers to let the opportunity of R&D tax relief pass them by. But, just like digital transformation, you should view R&D tax relief as an investment into the future funding of the business – and if you aren’t incorporating this into your business strategy, you can bet that many of your competitors are.
Fit for the future
The UK construction sector is facing immense, and unprecedented, pressures right now – and the introduction of IR35 and the reverse VAT charge has come at the worst possible time for businesses at the start of recovery from the pandemic.
However, 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 triggered by technological change and an investment into innovation.
In the not too 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 adaptable, and they must be strategic.
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