R&D tax relief in construction: navigating contracted-out rules and HMRC’s evolving position

The UK construction sector operates in a complex and contract-driven environment, where innovation is often delivered through layered commercial structures. With the sector having long been viewed by HMRC as a less compliant industry for claiming R&D tax relief, HMRC has increased its focus on industry compliance, particularly where activity takes place under contract.

Following the introduction of the merged R&D scheme from April 2024, alongside updates to HMRC’s Corporate Intangibles Research & Development (CIRD) manual, the framework for claiming relief has evolved. For construction businesses, understanding who is entitled to claim R&D relief is now more nuanced and closely linked to contractual arrangements.

The challenge: R&D in a contract-driven industry

Construction projects are rarely standalone innovation initiatives. Instead, delivery typically involves multiple parties, including clients, developers, main contractors, subcontractors and specialist advisers. As a result, entitlement to R&D tax relief is often less straightforward than in sectors where innovation is developed and commercialised by a single business.

This raises a key question: who is carrying out the R&D—and who has the right to claim relief?

HMRC’s current approach places greater emphasis on whether R&D is:

• Contracted out by a customer; or
• Undertaken independently by the contractor without customer awareness.

This distinction is central to determining eligibility under the updated regime.

Contracted-out R&D under the merged scheme

Under the post-April 2024 framework, HMRC’s focus has shifted towards the intent and substance of contractual arrangements, rather than simply identifying who performs the work.

In broad terms:

• Where a customer contracts a party specifically to undertake R&D, the customer is more likely to be entitled to relief
• Where a contractor initiates and undertakes R&D at its own cost and risk, it may still be eligible to claim

What this means in practice

For construction businesses, this represents a shift in how claims need to be assessed:

• Activities previously claimed by contractors may now fall within the scope of contracted-out R&D
• Entitlement to relief may sit with developers or end clients
• Contract wording and, particularly, commercial intent are increasingly important in determining eligibility

This marks a move away from earlier interpretations that focused primarily on technical delivery and risk alone.

HMRC’s CIRD updates: a tighter view on construction R&D

Recent CIRD updates suggest HMRC is taking a more structured approach to assessing construction R&D claims, particularly where innovation is delivered through contractual arrangements involving multiple parties.

1. R&D during the tender stage

HMRC recognises that R&D activity can take place during tendering, prior to a contract being agreed.

However, the guidance makes an important distinction:

• If a company develops innovative solutions independently in order to win work, this activity may qualify
• But if the work is effectively carried out in anticipation of a contract that will require R&D, HMRC may view it as part of a wider contracted activity

In practice, this could include developing alternative structural designs, new construction methodologies or site-specific engineering solutions to overcome technical challenges before a contract is awarded. Whether this activity qualifies will depend on the specific circumstances and the extent to which it is undertaken independently of any future contractual obligation.

Implication
Construction businesses should assess whether tender-stage innovation represents:

• Independent activity driven by the business; or
• An early phase of a wider contractual obligation for R&D to occur

2. R&D within contract delivery

HMRC’s revised position places more weight on whether R&D is required by the contract itself.

Key indicators of contracted-out R&D include:

• Contracts specifying the need for technical problem-solving or innovation
• Deliverables dependent on achieving uncertain technical outcomes
• Payment structures linked to performance or functionality

Where these conditions apply, HMRC may view the R&D as commissioned by the customer, even where the contractor undertakes the work.

Implication
This interpretation is particularly relevant for design-and-build projects and other arrangements where innovation is embedded within contractual deliverables.

While the revised guidance creates additional complexity, it also provides greater clarity around the factors HMRC considers when assessing entitlement. Businesses that understand these principles and review projects proactively are likely to be better placed when preparing or defending claims.

Reassessing construction R&D claims

In light of these changes, construction businesses should take a more structured and commercially aligned approach to R&D claims.

Key actions for construction businesses

Review contractual arrangements

Contract terms and ways of working are now central to determining eligibility. Businesses should consider:

• Whether R&D is explicitly or implicitly required
• Who defines the technical objectives
• Who benefits from the outcomes

Assess who is entitled to claim

Undertaking R&D activity does not automatically create entitlement to relief. Construction businesses should consider who intended the R&D to take place, who commissioned the activity and who retains the benefit of the outcomes.

Identify qualifying tender-stage innovation
Businesses should clearly distinguish:

• Independent innovation (potentially claimable), and
• Work that feeds directly into contracted obligations (potentially restricted)

Strengthen documentation and supporting narratives

Claims must clearly demonstrate:

• Why the R&D was initiated
• How it relates to contractual obligations
• The commercial and technical context

Opportunities still exist - with the right approach

While HMRC scrutiny has increased, R&D tax relief remains accessible for construction businesses that adopt a robust and evidence-led approach.

Opportunities are more likely to arise where:

• Innovation is driven internally rather than contractually mandated
• Contractors develop proprietary methods or solutions
• Technical risk and decision-making sit with the construction business

Early-stage innovation, including design development and bidding activity, also remains an important area where eligibility can arise when appropriately evidenced.

Turning complexity into clarity

R&D tax relief in construction is increasingly shaped by contractual and commercial considerations, as well as technical activity.

As HMRC continues to refine its approach to contracted-out R&D, construction businesses should ensure that contractual arrangements, commercial intent and technical activity are considered together. Taking a proactive approach now can help reduce uncertainty, support claim quality and maximise access to available relief. This should form part of a wider review of qualifying R&D activity, costs and supporting evidence across construction projects.

We’re here to help

At Azets, our specialists support construction businesses in navigating the complexities of the evolving R&D regime, particularly where activity sits within contracted arrangements.

From reviewing contractual terms to strengthening claims in line with HMRC guidance, our specialists provide practical, sector-focused advice to help you maximise value while maintaining compliance.

Get in touch to discuss your R&D position.