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COVID-19: R&D support for manufacturing and construction companies

Emma Clewes, Director, Corporate Tax
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On 10 May, the Prime Minister indicated that the construction and manufacturing industries are two of the sectors that can get back to work as part of the phased exit from the COVID-19 restrictions. 

As they begin to emerge from lockdown, companies should consider the activities that their employees and contractors will be carrying out to identify innovative projects that would qualify for R&D tax relief. Companies will also need to consider the impact of any government support measures on their R&D tax relief claims.

Both industries can utilise R&D tax relief to their advantage in order to help them get their businesses back on track.

Profitable SMEs can recover up to 43.7% and loss-making SMEs are able to recover up to 33.35% of qualifying expenditure on their R&D activities. This makes R&D tax relief a valuable source of funding. For example, a profit-making company incurring £100,000 of qualifying expenditure could receive £43,700 of tax savings and a loss-making company could receive a repayment of £33,350.

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Property & Construction

Property and construction is a diverse and innovative sector, making advances in building technology and methodologies in response to the ever increasing demands of regulation, sustainability and environmental performance.

Innovative building solutions can include, for example:

  • zero carbon performance
  • modular construction techniques
  • meeting specific structural specifications
  • sustainability and material limitations.
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UK manufacturing is an enormously innovative sector, making advances in manufacturing processes and products in response to the ever increasing market demands from a vast array of industry sectors including automotive, aerospace, rail and technology.

Innovative manufacturing solutions can include, for example:

  • new product designs
  • new materials for sustainability
  • increasing speed and efficiencies of processes
  • weight and size reductions of parts and components.

Government support for UK companies affected by the COVID-19 pandemic includes the support for employees through the furlough scheme and the Coronavirus Business Interruption Loan Scheme (CBILS). Both may have an impact on a company’s R&D tax relief claim.

Furloughed employees – impact on R&D tax relief claims

Employee salaries generally form a large part of the expenditure that qualifies for R&D tax relief. COVID-19 government support through the furlough scheme will have an impact on the way in which the qualifying expenditure is calculated and the availability of the SME R&D tax relief.

Therefore, careful record keeping and calculation of qualifying employee R&D activity is important in making a valid R&D claim.

CBILS and grant funding – impact on R&D tax relief claims

The CBILS and innovation grant funding are considered to be state aid and restrictions apply to the amount of state aid that can be received by a company in relation to its R&D projects. SME R&D tax relief is sufficiently generous that it is also a form of state aid, so the restrictions potentially apply to companies who have utilised this funding. As a result SME R&D tax relief may then not be available.

If affected, the company could claim relief under the R&D Expenditure Credit (RDEC) scheme, however, subcontractor expenditure, which is prevalent in the construction and manufacturing industry, may not qualify for relief.

The rules are complex and so any company considering whether it is able to claim R&D tax relief should obtain advice from a tax professional.

Read more on SME R&D tax relief and what new funds are available to innovative companies during COVID-19.

If you are in the property and construction or manufacturing industry and wish to explore a potential claim for relief please contact us.

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Stuart Weekes
Stuart Weekes
Partner, Corporate Tax
Thames Valley