The Innovation Funding Gap: Why British Architects Are Missing Out On a Financial Windfall
British architecture is leading the way in innovative design, but many firms are failing to take advantage of the financial benefits that accompany it. William Garvey, MD of Leyton UK, explains the problem, and what architects can do to resolve it
Snøhetta’s Powerhouse Brattørkaia is a striking example of a project that includes embodied energy in its design framework. Images credit Snøhetta
MD of Leyton UK
A look at the winners of the Royal Institute of British Architects (RIBA) awards for 2019 highlights the world-leading innovation currently being driven by British architects.
Transformative design spans form and geography, from major cultural centres such as the Tate St Ives, to futuristic additions to the London skyline, including the Bloomberg and Leadenhall buildings. There are also community and local authority-led redevelopments, including the radical Stonyhouse childrens’ library in Chester and the Kings Crescent Estate in East London.
This innovative thinking enables building designers to win contracts and offer sustainable and radical solutions to meet design challenges across the UK. However, new evidence reveals that many architectural firms are not claiming a financial windfall for their innovation in the form of R&D tax credits.
This could even equate to potentially hundreds of millions they are collectively missing out on.
R&D tax relief
Overall, the UK currently invests just 1.6% of GDP into R&D, below the European average of 2%. Part of the government’s strategy to tackle this is by encouraging tax relief and funding opportunities for companies in the sector. Under the government’s Industrial Strategy, research funding will be increased to 2.4% of GDP by 2027.
R&D tax credits are designed to encourage greater spending in research and development, leading to greater investment in innovation. The way the scheme operates is by reducing a company’s tax bill by an amount equal to a percentage of the company’s qualifying R&D expenditure or by the payment of a credit, again linked to the company’s qualifying R&D expenditure.
“ Many of Britain’s largest firms are either non-claiming or under-claiming the R&D tax credit they are owed. ”
While Leyton has put an encouraging £1.6m back into the architecture sector over the last year, analysis of the latest statistics from HMRC on the number of companies in the sector claiming R&D tax credits suggests many of Britain’s largest firms are either non-claiming or under-claiming the R&D tax credit they are owed.
In the last tax year, there were 1,570 claims for construction and a paltry 145 for real estate, generating £100m in income. Combined, they were responsible for just 4% of all claims, despite making up 11.4% of the UK economy. To put this into context the top performing sector, manufacturing, claimed for over £1bn. In a worsening economic climate, this could have a significant impact on the bottom line.
Analysis of Leyton’s client base further highlights the knowledge gap about this scheme, as a large proportion of clients in the architectural sector every year come from businesses that have never previously claimed under the scheme.
So why the shortfall? A big challenge for building designers comes from the lack of understanding about what constitutes research and development. As defined by government, R&D covers a very broad set of activities across numerous sectors. Within architecture and building design this can cover new processes, design and computing, ranging from improvements to existing approaches or the development of new methods.
An example of a company who has successfully claimed is 6A Ltd, known for contemporary art galleries and educational buildings, often in sensitive historic environments. 6A has consistently been recognised for its innovative approach, yet has only recently claimed for this innovation. Jonathan Wong, business director, comments that the R&D tax credit came as a welcome respite to the architecture firm, easing medium-term capital requirements.
“ We believe organisations in the architectural sector are underclaiming due to a lack of understanding about what they can legitimately claim for. ”
According to Wong: “When you look at the timeline of a project as an architect, you go for months without seeing any fees. Ironically the project usually slows down just when the innovative elements come into play. As a result of this revenue coming back to 6A, we’re able now to carry on growing our business.”
We believe organisations in the architectural sector are underclaiming due to a lack of understanding about what they can legitimately claim for. A detailed scoping process can identify how much money a company would receive for government funding, grants or tax credits – creating a pool of innovation resources for re-investment. This can further the continuous innovation culture of the business.
With threatening headwinds and subdued activity reported in the first set of economic figures for 2019, R&D tax credits represent a much-needed shot in the arm for British architects. Walking in the footsteps of Zaha Hadid and Norman Foster, British architects continue to lead the world in innovation and should act now to ensure they don’t miss out on the financial credit they are owed.