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Carbon credits and R&D tax relief

23rd Oct 2009
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Mark Lee talks to R&D tax credits consultant Micah Levy about the synergies between the two schemes and how companies can benefit.

With increasing government pressure to cut carbon emissions, firms are looking at ways to leverage their energy saving spend. Companies that are investing in carbon cutting research and development can benefit from HMRC’s Research and Development (R&D) Relief.

For the uninitiated, Research and Development (R&D) Relief is a corporation tax relief that may reduce your company’s tax bill by more than your actual expenditure on allowable R&D costs. Alternatively, if your company or organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue & Customs (HMRC) - but you can only claim R&D Relief if the company is liable for corporation tax.

The missing link
So, you might ask, what’s the connection between carbon credits and R&D Relief? Levy explains: “For a project to qualify for R&D Relief, it has to meet two main criteria:

  • The project has to be trying to achieve some kind of technological advance.
  • The project must attempt to overcome some kind of scientific or technological uncertainty.

These can be found in a variety of green projects that extend well beyond their ability to attract carbon credits and in fact, most technologically innovative projects will qualify for the relief by meeting these criteria”.

Under the above criteria, examples of technological advances in green projects could include processes or inventions which:

  • Produce less carbon dioxide.
  • Produce the same levels of power as existing technology using renewable energy sources such as bio-energy, wind energy and solar energy.
  • Produce less non-recyclable by-products.

In terms of overcoming a scientific or technological uncertainty, examples of such questions include:

  • Is it possible? (e.g. ‘Is it possible for us to develop a new machine that provides the same output but is more efficient and uses less energy?’)
  • What’s the best way? (e.g. ‘Which manufacturing processes will result in the least energy usage?’)
  • How do we deal with the complexity of the system as a whole (e.g. ‘If we combine materials X, Y and Z together, will this reduce the amount of wastage in the finished product to our required levels?)

The benefit of making an R&D tax relief claim depends on whether the company qualifies as an SME under EU regulations or is considered a large company. “An SME can get a 175% deduction on eligible expenditure or if it’s loss making, a 24.5% cash back sum from HMRC. In contract, a large company is limited to a 130% tax deduction”, advises Levy.

The good news is that firms don’t necessarily have to be carrying out R&D projects themselves in order to qualify.
“Under the Kyoto treaty, many carbon reduction projects are performed overseas, particularly in developing countries, with the resulting credits purchased by companies in the UK to offset their own emissions. This issue is therefore of interest to many companies”, he notes.

Carbon credits are not an eligible cost category for R&D expenditure and if they are purchased as part of a wider R&D project to achieve a certain level of carbon output, this expenditure would not be eligible for the relief.
“However, the good news is that if a company has subcontracted a carbon project, for example to a company in India, then potentially, then this could qualify under the SME regime which allows subcontracted expenditure as a valid cost category and assuming that the work being carried out meets the R&D criteria as explained earlier”.

Micah Levy is an independent R&D tax credits consultant and runs

Mark Lee is consultant practice editor for and chairman of the Tax Advice Network.


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