The announcement appears to mark the first stage of a ‘green industrial revolution’, which will attempt to accelerate the UK’s progress towards zero net emissions by 2050. This comes on the tail of Stanford University predicting in early 2020, that the world could be powered by renewable energy within 20-40 years and more latterly a pledge made at the UN biodiversity summit that the UK government will protect 30% of the UK’s land for nature.
It would, therefore, appear to be an appropriate moment for companies involved directly or in support of the renewable energy sector to look at the tax reliefs and funding available for undertaking research and development into renewable energy development and specifically, Research and Development Tax Relief (R&D).
These announcements may also suggest that HM Revenue & Customs (HMRC) are more relaxed in respect of research development claims relating to green and renewable energy projects.
Renewable energy market
It should be noted that the UK renewable energy generation market is dominated by large, and in some cases, multinational companies based outside the UK. However, this should not detract from the research and development activities which small and medium sized UK companies are undertaking in designing new and bespoke renewable energy systems, wind turbines and tidal barrage systems on either a stand-alone basis or in support of these larger non-UK companies.
The nature of renewable energy requires research and development to be undertaken by companies who understand regional differences in topography (both onshore and seabed), weather and tidal flows and currents. For instance, shallow water offshore wind farms can be found in the Irish Sea off the Sefton coast in Liverpool Bay or estuarine windfarms in the Thames Estuary off the Kent coast, as well as deep water and floating turbines located in the far north east coast of Scotland. All these regions of the UK present differing challenges and local knowledge. In many cases, local engineering firms, marine engineers, naval architects and IT developers will be providing professional support, services and expertise to the larger companies and possibly undertaking the actual research and development activities themselves.
Examples of qualifying research and development projects
Research and development is not limited to the actual green energy producing asset design and systems, it can also and in many cases, relate to uncertainties encountered in creating new processes, products and systems, making appreciable improvements to existing ones and using science and technology to duplicate existing processes and products, for example:
- development and/or appreciable improvement to autonomous underwater vehicles (AUV) and specialist tools (Advanced Engineering)
- development of extreme environment safety equipment (Advanced Materials)
- improvements to construction processes and materials used in the turbine blades, tower, foundations and anchoring (Construction)
- development of innovative IT systems and programs to navigate offshore wind farms, control of energy flows and digital communications (ICT).
Who can claim R&D tax relief?
It should be noted that even when a large company is involved in the research and development, small and medium enterprises undertaking R&D activities on behalf of the large company (sub-contracted) may still qualify for R&D tax relief.
With this in mind, it may be useful to understand the scope and value of the two R&D tax schemes available to SME UK companies undertaking research and development on renewable energy schemes, both directly (SME Scheme), or as a sub-contractor to a large company (RDEC Scheme).
Small or Medium Size Enterprise (SME) undertaking the research and development itself
An SME undertaking qualifying research and development themselves, may be able to claim an additional 130% deduction (SME scheme) on top of the qualifying R&D expenditure deduction, therefore for each £1,000 spent on R&D activities they would be due a further deduction of £1,300 against their profits, which ultimately would equate to a corporation tax saving of approximately £247, in addition to the standard corporation tax saving of £190, if the company was profit making.
Alternatively, if £1,000 was spent on qualifying R&D activities and the company was loss making in the year of the claim, they could claim a repayable tax credit of up to £333 via the surrender of the R&D related losses (subject to the overall value of the loss).
Small or Medium Size Enterprise (SME) undertaking sub-contracted qualifying research and development on behalf of a large company
If an SME was sub-contracted to undertake qualifying research and development activities on behalf of a large company they may be able to claim a Research and Development Expenditure Credit (RDEC scheme) on the qualifying R&D expenditure as the sub-contractor.
If this is the case, for each £1,000 spent on qualifying R&D activities by the SME, they would receive a tax credit of approximately £105 (based on the current tax rates) as well as the standard corporate tax saving of £190.
As a note for the future, the government plans to introduce a PAYE based cap on payable tax credits arising on SME R&D claims from 1 April 2021 which will limit the amount of tax credit that can be immediately repaid from any claim made by a loss-making company. In light of the current uncertainties in the UK economy arising from both the global pandemic and the possible effects of Brexit, there is a possibility that this revision to the R&D system may be again delayed.
For more information please contact myself, Lee Pimlett on either 0161 236 6936 or l.pimlett@uhy-uk.com.
