As the construction industry slowly knits itself together for the future, Ryan Sian ACCA of RandD UK, writes about the gaps between sustainability, skills, and profitability
As the effects of climate change become increasingly apparent, reaching net zero is an essential goal of the current UK government. In several announcements before and after their election success, Labour stated that sustainability was the top priority for construction under their management to meet these goals.
With a large portion of the UK’s emissions coming from its housing stock, ensuring that all new buildings are environmentally friendly and that existing buildings are retrofitted will help to reduce the UK’s impact on the planet. However, the construction industry faces numerous simultaneous challenges that can remove focus from sustainability.
Challenges like interest rate changes, rising material costs and skills shortages mean innovation and creativity aren’t always at the forefront of construction. But, though there are many challenges facing the construction industry, innovation is a key strategy to limiting losses and reaching these vital sustainability goals.
How other challenges impact sustainability and innovation
The most significant challenge to innovation in the construction industry is the ongoing skills shortage. With the rapid advancement of technology and fewer younger people joining the industry than in previous generations, construction faces upskilling challenges on two fronts.
Though the outlook for the industry has improved during 2024, high interest rates and a knock-on effect on material costs caused a slowdown of work that some businesses may still be recovering from. With high interest rates still eating into margins, room for error may feel like too much of a risk for businesses right now.
While this suggests that businesses should be diverting more time into solving these problems, encouraging innovation and creative thinking could help businesses come up with creative ways to use materials, attract talent and cut costs in processes.
Prioritising sustainability through innovation
Research and development happen constantly across the construction sector, especially when it comes to searching for sustainable alternatives to techniques and materials. However, there is still a long way to go before the UK reaches net zero and more needs to be done to promote innovation on construction sites.
An effective way to promote innovation, especially as a small business, is to properly monitor how R&D is being conducted and identify which projects are eligible for government funding.
Construction as an industry makes the fourth-most R&D tax, with 4,000 claims registered in 2022, but no doubt hundreds of firms aren’t taking full advantage of the scheme to develop their processes.
Eligible sustainable projects
Though every business can claim for their R&D projects, understanding what work is eligible for funding is one of the biggest challenges and often discourages people from applying. Some of the most common reasons funds are granted include to reimburse the development of new products, processes or services – or improve existing ones.
Examples of R&D activities that could qualify for tax credits include trialling new materials, developing prototypes, and problem solving. Your work doesn’t even have to be successful to be eligible, helping you limit losses further while enabling creativity and innovation.
However, even if your staff are the first to apply or utilise a specific technology in the UK, you may still have your application rejected because you’re not able to clearly state how your changes improve sustainability, which is why getting your application right is so important.
Changes to R&D tax claims
As mentioned, innovation is happening consistently in the construction industry, making it one of the highest claiming industries for R&D tax credits. However, recent changes to the scheme over the past few years mean there have been more refusals than ever before.
Over the past few years, the government has announced a crackdown on the scheme amid suspected fraudulent claims. This has led to some genuine applications being refused, potentially discouraging businesses even more from investing in creative innovation.
What this means is that construction businesses need to properly understand how the scheme works and what to include on their applications to ensure their projects are eligible and that they can pass the government’s anti-abuse restrictions.
How to know if your work is eligible
Firstly, you need to understand what scheme you’re eligible for. There are two R&D schemes you can apply for, with the merged R&D expenditure credit scheme covering all businesses except for loss-making SMEs, who can apply for the enhanced R&D intensive support scheme.
The merged R&D expenditure scheme is an amalgamation of the two previous schemes which catered to larger businesses and SMEs. Under the new scheme, businesses of all sizes can apply. Claims can be backdated by two years, meaning the previous schemes may be relevant. In this case, the R&D expenditure scheme is for large businesses while the SME scheme supports businesses of under 500 people.
The intensive support scheme offers increased reimbursement for loss-making SMEs but requires a business to have fewer than 500 employees, achieve a turnover of less than £84m or have a balance sheet total of less than £72m and make a trading loss for tax purposes.
In terms of which projects are eligible for reimbursement, it’s best to have a designated person at your organisation who can assess projects against the government’s criteria. Typically, your work can be eligible if you are trialling and developing systems to potentially improve performance, developing bespoke solutions within your work, and adapting to changes in legislation or industry requirements.
Preventing loss through innovation and creativity
Though there are plenty of challenges construction companies face that are likely getting in the way of their commitment to innovation, developing new processes and materials is a key strategy to preventing losses and meeting sustainability targets.
Despite rejections being more common as the government aims to prevent abuse of the system, genuine claims need to be made to prove that innovative businesses can benefit from trialling new processes, even if those processes don’t lead to a complete success
