What shows your appreciation for a prospective client better than cutting £1m off a bid? Building explores the surprising savings that can be made from tax-efficient tendering
So we’re all clear on one thing: it’s a client’s world out there. Contractors, for now at least, are expected to deliver exactly what the client wants, and more. For the supply chain this means that you not only have to be the best to win work, you have to offer something extra, something that gives you the edge over your competitors. Tax-efficient tendering may not spring to mind instantly, but this is a hidden gem that could save clients an awful lot of money.
Chris Hill, a construction and engineering lawyer at Norton Rose, says: “Anything you can do that shows you have really thought about a tender is key. And taking that one step further, showing you have really thought about how you can make a particular project as efficient as possible for the client, is a huge bonus. In terms of using tax benefits and incentives as a tactic to impress clients, I think this is especially good.”
The incentives: A quick guide
There are a number of tax incentives for the construction industry (see box, right), and their value to the client’s overall tax position varies. Aubrey Calderwood, director of property tax depreciation consultant Capitus, gives the enhanced capital allowance scheme (ECA) as an example: “If a client has specified an energy-efficient lighting scheme, the ECA scheme allows him to offset 100% of that cost in the first year it is incurred. If, on the other hand, the lighting scheme is not an ’energy-efficient’ one, only 10% can currently be claimed in the year incurred, with the remaining balance being claimable over a much longer period of time.”
One incentive to keep a particularly close eye on is land remediation relief (LRR) as it can be the difference between a site that is financially viable to develop and one that is not. Calderwood explains: “LRR is given at the rate of 150% of the qualifying expenditure on remediating contaminated land. For example, if a former petrol station site is lying derelict, infested with Japanese knotweed and has underground petrol tanks and interceptors that will cost £200,000 to remove and remediate, the client will be able to offset £300,000 (£200,000 x 150%) against their taxable profit in the year in which they carry out the work. Alternatively, if the cost of remediation leads to a loss, they will be able to surrender that loss for a tax credit equating to 16% of the qualifying LRR (£48,000 in this example, assuming a qualifying loss of £300,000).”
Putting it into action
So how exactly can contractors go about using these tax incentives to impress increasingly demanding clients?
“The first point to make is that a contractor should not assume that the client will be aware of the potential tax relief his tender will contain,” says Calderwood. “Nor will the client’s accountants, who will usually only be involved at the financial year-end. It is also unlikely that the client’s QS will appreciate the true value of the tax relief in respect of the tender.” The trick then for the contractor is to wow the client with this additional knowledge and ensure they take the opportunity to highlight the financial benefits as part of their tender submission.
Calderwood adds that this is just the bare minimum contractors can do in terms of tax-efficient tendering. The process can be developed to even more sophisticated levels, depending on the procurement route envisaged and the element of design responsibility resting with the contractor.
“Take the example of a proposed project let under a JCT design-and-build contract where the client simply invites tenders for a 10,000ft2 office building which must achieve an ’excellent’ BREAAM rating,” he says. “In this scenario, the contractor has control of both costs and design so has the opportunity not only to produce a very energy-efficient building but can also design in tax-saving measures leading to a lower post-tax cost of construction and lower running costs. The ultimate objective is to add value to the tender submission without adding significant capital cost,” he says.
Where the relief is
- The main tax incentives available on construction projects are:
- Plant and machinery allowances for general equipment and fixtures
- Plant and machinery allowances for alterations to an existing building associated with the installation of plant or equipment (refurbishment of existing premises only)
- Plant and machinery allowances for investment in energy and water efficient technologies (the enhanced capital allowance or ECA scheme)
- Land remediation relief for the remediation of contaminated or long-term derelict land
- Business premises renovation allowances for bringing disused commercial premises back into use in disadvantaged areas
- Flat conversion allowances for converting disused space above shops into flats
- Industrial buildings allowances for qualifying industrial property and hotels (being abolished in April 2011)
For more information, go to www.capitus.co.uk
What it’s worth to clients
This is best illustrated by two examples. In both cases, the client pays corporation tax at 28%:
Empty building converted into a boutique hotel in a disadvantaged area, such as regenerated docks
Tender price submitted for hotel conversion £6,000,000
Amount of tender price qualifying for tax relief £6,000,000
Cost of tender to client after taxation £4,320,000
Construction of a 30,000ft2 air-conditioned office building on a contaminated site let under a design-and-build contract
Tender price for office construction £3,900,000
Cost of remediating land £500,000
Element of tender qualifying for general capital allowances £180,000
Element of tender qualifying for enhanced capital allowances £772,000
Cost of tender to client after taxation £3,423,440