Despite clean energy investment being prominent on the government’s environmental agenda, many manufacturing companies aren’t aware of the associated tax reliefs available to facilitate their investment in clean energy. This is inhibiting some companies from investing in sustainable energy solutions, and others may be investing yet missing out on the associated tax benefits.
The government has identified boosting investment in clean energy as part of its industrial strategy, and if the UK is to keep up with the global shift to clean growth, manufacturers need know how the tax reliefs work, whether they qualify and how to apply.
The UK has the lowest corporation tax in the EU, making it an attractive location for businesses, and additional tax reliefs, available across a wide spectrum of renewable and manufacturing areas, are an additional incentive that can make a substantial difference to return on investment.
Capital allowances enable the tax system to provide relief for capital expenditure with routine claims made for investment in machinery. However relief often isn’t claimed when, for example, contaminated land is cleaned up prior to a build, or where an energy efficient plant is used. In many cases ‘contaminated land’ costs relate to the clean-up of a site after previous chemical use, or to get of rid asbestos. Tax relief can reduce the effective cost of carrying this work out by around 10%, which can be a substantial saving.
Manufacturers can benefit from ‘enhanced capital allowances’ which provide 100% first year tax relief for capital expenditure on specific items; energy efficient lighting and low CO2 cars for example. Giving the business 100% tax relief for the cost in the first year, rather than having to wait six years to obtain tax relief for only 70% of the cost, as would normally be the case with normal plant and machinery, is a big plus.
Many manufacturers are also failing to capitalise on tax relief for research and development (R&D) investment due to not understanding the incentives available, and the perceived time and effort required to make a claim. However, with the right set up, the claim process can be smooth and efficient. By keeping track of projects which the business feels may qualify throughout the year and monitoring costs (which would happen anyway), the claim at the year-end shouldn’t be a significant burden, especially if the company enlists professional assistance.
It’s important to remember R&D tax relief isn’t just for people in white laboratory coats. If your project meets the definition set out by the Department for Business, Innovation and Skills, you should claim. Any project that seeks an advance in overall knowledge or capability through the resolution of scientific or technological uncertainty qualifies and for manufacturing this could involve product development, evolving a manufacturing process or reviewing supply chain management.
To align with the government’s industrial strategy and benefit clean energy projects, manufacturers need to carefully monitor projects and capital spend with tax reliefs in mind. Where strong records have been kept, often the company’s advisers will be able to build in the benefit of the tax reliefs into the year-end process.This should facilitate an efficient process, making cash tax savings available for further investments.