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.
Catax Solutions Limited look at what businesses need to be aware of…
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[i].
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[ii].
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.
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.
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