By Nigel Holmes, head of R&D Technical Operations, and Karen Taylor, group head of Grants, at specialist tax consultancy Catax
We are in the midst of a green revolution, but our progress toward Net Zero would be impossible were it not for the innovators – the companies striving to improve technologies and develop ones we cannot even conceive yet.
All over the country, businesses large and small are drawing up blueprints for the next advances that will make our homes greener and reduce emissions and pollution.
However, innovation in any form usually requires significant upfront investment. This can make it less attractive to businesses focused in the short term on maintaining healthy cash flow and protecting profit margins. Even for companies committed to innovating regardless of the cost, the big leaps forward in technology, systems and processes would be out of reach for many without financial assistance.
Yet the innovations companies are already undertaking – and those they will in the future – are crucial in the fight against global warming and worsening environmental problems.
Thankfully, help is at hand through R&D tax relief initiatives and grants.
Unfortunately, we know from our own experience that too many companies remain unaware of these schemes. Take-up for Patent Box in particular remains low, and awareness is especially poor among SMEs. But if we are going to tackle the biggest environmental issues facing our planet, it is important that knowledge of these schemes becomes more widespread and that companies utilise them to propel us into a greener, cleaner world.
What are R&D tax credits?
The UK likes to think of itself as a global centre for research and development, and it has the tax breaks to match — a fact that is becoming increasingly important in light of the Government’s ambitious plans to reach Net Zero by 2050.
That the R&D tax credit scheme has been successful in stimulating innovation is clear when you consider that it has been running for two decades. More than 300,000 claims have been made in that time, with total tax relief hitting £33.3 billion.
Yet too many companies do not realise they are “doing R&D”. This can be due to the fact they see it as their day job, or they think R&D is for pharmaceutical companies curing diseases in laboratories.
But the scheme is open to any company investing time and money in new products or processes that meet HMRC’s definition of R&D. Any firm whose work seeks a “scientific or technological advance” and has faced a “scientific or technological uncertainty” can claim. This can take the form of a new process, product or service, or be an improvement to an existing one.
Firms can claim either a reduction in their limited company’s corporation tax bill or a cash lump sum (depending on whether the company is profitable or loss-making) – the average claim is £73,000.
Qualifying expenditure include staff costs – also covering subcontractors and externally provided workers, materials consumed, software and more.
The work does not even need to have been recent. Claims can be backdated up to two years from the end of the accounting period in which the work took place. Overall, R&D tax credits for SMEs are worth between 24.7% and 33.4% of qualifying expenditure, so it’s a significant benefit.
Companies with green technologies have already benefited
Successful R&D claims for green technologies are being made in a broad range of sectors.
One client, for example, has received a tax benefit to the tune of £114,000 so far for their ongoing commitment to improve farming and agricultural processes. They have made their equipment more eco-friendly by designing increasingly efficient systems for the drying of products, and cleaning and chopping.
Another company – which has received £54,000 in benefit so far – has become one of the leading manufacturers of low volume and high technology battery products. It designed a smaller battery pack to fit a popular compact car, supporting the global move from fuel to electric. The project had a number of complications, including retrofitting a new battery into a classic car with little space, while also ensuring it was highly efficient and low weight.
Meanwhile, another client has developed eco-friendly paint to prevent marine life attaching onto a vessel’s hull and causing drag. Not only is the paint better for the environment than previous solutions involving pesticides and volatile organic chemicals, it only requires two coats rather than four. The company has received a tax benefit of £39,500.
The money these companies, and thousands like them, have claimed is often pumped back into even more R&D work, building on the progress they have already made and playing an important role in helping their relevant industry become more sustainable and eco-friendly.
R&D is not the only tax relief
R&D is just the tip of the iceberg in tax reliefs on offer.
The development of green technologies often involves creating intellectual property, which may need to be protected via a patent.
This is where another tax relief scheme can come in useful. Patent Box reduces the Corporation Tax paid on patent-related profits to an effective 10% tax rate compared to the normal 19%. However, as the newest of three tax relief schemes, a huge proportion of companies remain unaware of it.
Yet Patent Box can even be worthwhile for loss-making companies to consider. If a company is loss-making overall, but has made profit from its patented products, it is still worthwhile claiming, as it increases the tax loss available elsewhere.
However, watch out for patents being registered in an individual’s name, rather than the name of the company that carried out the development of the product. Such an ownership arrangement means Patent Box is not available. While the sale or licensing of the patent will resolve this, it does lead to additional legal costs and other tax implications.
Using grants to unlock innovation
The strides companies are making in green technologies are crucial not just for protecting the environment, but also to help the UK bounce back from the economic consequences of the pandemic.
Grant funding will therefore almost certainly play an increasingly important role in freeing up funds to enable businesses to innovate.
One recently launched grant scheme from the Department for Business, Energy & Industrial Strategy is making £19.5 million available to projects developing novel Carbon Capture, Usage and Storage technologies and processes that reduce the cost of deployment. It is open for applications until August 29.
Meanwhile, the Low Carbon Hydrogen Supply 2 Competition aims to provide funding for projects that can help develop a wide range of innovative low-carbon hydrogen supply solutions. It is open for applications until August 2, while an energy storage innovation competition is due to launch later this year.
Other funding sources outside of the Government include Innovate UK. It is part of UK Research and Innovation, a non-departmental public body funded by a grant-in-aid from the UK government. Since 2007, Innovate has invested around £2.5 billion to help businesses across the country, with match-funding from industry taking the total value of projects above £4.3 billion.
These are just a few of many grants available, and there will doubtless be many more schemes opening in the coming year. It can be a minefield sourcing the best grant funding streams and then applying, but experts can help you navigate this field and unlock the all-important cash to set a project on its way.
Some tax relief is available to companies receiving grants
It is worth remembering that a project cannot receive state aid twice. This means that if a state aid grant has been received, then the company cannot claim SME R&D tax relief. However, this does not mean tax relief is not available.
Legislation allows the company to claim Research & Development Expenditure Credit (RDEC). It is not as generous but does allow a project funded by a state aid grant to have some additional R&D tax relief too.
Don’t overlook Capital Allowances
It’s easy to forget about physical assets, as you don’t necessarily consider the place you work every day as being something eligible for tax relief. However, Capital Allowances (CAs) are a form of tax relief that relate to physical assets and can be worth considering.
CAs allow firms to offset the Corporation Tax they pay on profits against the expenses associated with a commercial property such as air conditioning, wiring, heating, lighting and security systems.
They are a tax relief on profits, so there can be no immediate benefit if a company is loss-making. However, if a loss-making company is also making an R&D tax relief claim, a CA claim can increase the amount that HMRC will pay on the R&D claim.
Remember your record keeping
For anyone considering embarking on a project which could be eligible for R&D tax credits, it is worthwhile keeping a paper record as you go.
HMRC explains that there is a difference between making an unexpected discovery and the carrying out of R&D. For it to count as R&D, there needs to be a systematic project seeking to achieve an advance in science or technology.
Therefore, from the outset of your project, it is worth noting down what advances you are hoping to make and putting it in the context of the current state of knowledge and technology. This demonstrates your intent of making an advancement – and not that you just stumbled upon something new.
There is no record-keeping requirement specifically for the purposes of claiming R&D relief, but documents you could consider keeping track of include copies of meeting notes and correspondence relating to the research, contracts, invoices, bank records and PAYE records.
Our research suggests that although around 800,000 UK businesses are likely to be eligible for R&D tax relief, just eight per cent are claiming it.
As we march toward Net Zero, for the sake of the environment and the economy, the country needs companies which are innovating in the green space now more than ever, and these schemes are set up to help.
But we also know the world of R&D can be a minefield at times, especially for those who have never accessed it before. The tax laws around R&D tax relief are complicated, and the criteria for eligibility can be ambiguous. In order to get the largest tax relief return, companies need to have an expert on your side.
There’s no risk attached to an initial assessment with our experts, which will only take around thirty minutes. We’ll carry out a thorough assessment and if we can’t see an opportunity for an R&D tax relief claim, you walk away without spending a penny.
But if there is an opportunity to claim, companies can unlock tens of thousands of pounds – even hundreds of thousands in some cases. It’s worth enquiring to see what you might be able to get back.