Did you know that reducing your environmental impact may also reduce the impact of your tax bill?
Anthony Lalsing, tax director at accountancy firm, Menzies LLP, writes: In recent years, a surge in consumer demand for more sustainable products and services has turned manufacturers’ attentions to finding ways to reduce their environmental impact. Despite this, many environmentally-aware businesses may not realise that their activities could be eligible for valuable research and development (R&D) tax relief.
An increased awareness of issues such as climate change and plastic pollution has caused many manufacturers to go back to basics. Not only are they carefully considering the green credentials of the products they sell, they are also placing a greater focus on the carbon footprint of their production processes. As well as helping them to maintain margins by responding to customers’ demands for more sustainable products, such activity could also qualify as R&D.
R&D is often considered an essentially ‘scientific’ activity, carried out by white coats in laboratories, so some manufacturers may not know that the sustainable solutions they develop and the steps they take to reduce their environmental impact, could qualify for attractive R&D tax incentives.
To qualify for R&D tax relief, businesses must satisfy HMRC’s criteria, which involves making an advance in science or technology. This can be a new product - for example, the development of a recyclable coffee cup – a new process , or an improvement to an existing one. The activity should also aim to overcome uncertainty and serve as a solution to a problem that could not be easily solved.
Challenges such as environmental pollution and waste are increasingly requiring manufacturers to adopt a problem-solving approach, and may not be easily solved using conventional methods. As such, innovative thinking and R&D may be required. For example, a food manufacturer may decide to introduce automation technology and parallel processing to reduce the running time and therefore the environmental impact of their machinery.
There are two schemes under which green-thinking manufacturers may be able to claim R&D tax reliefs; the Small or Medium-sized Enterprise (SME) scheme or the Large Research and Development Expenditure (RDEC) scheme. In order to claim under the SME scheme, manufacturing businesses must have no more than 500 employees, an annual turnover of less than €100m or a balance sheet of less than €86m. Businesses that fail to meet this criteria may be able to claim a Research and Development Expenditure Credit.
Under the SME scheme, eligible manufacturing companies can claim an additional 130 percent corporation tax deduction for qualifying R&D expenses. In effect, for every £100 spent, they could lower their corporation tax liability by almost £25. On the other hand, the RDEC enables larger organisations conducting qualifying R&D activities to claim a taxable credit of 12 percent of any qualifying expenditure. SMEs may also be eligible to claim the RDEC if they have been subcontracted to undertake R&D activity for a larger organisation.
In order to optimise their chances of making a successful claim, it’s vital that manufacturers keep accurate records throughout all stages of their R&D activity. Keeping records of time spent on projects and R&D can help businesses to track expenditure as the project progresses, ensuring that no eligible costs are missed. Any grants and alternative funding received by the organisation can also impact the type of tax relief that can be claimed, so having a clear understanding of this is essential.
It’s important to bear in mind that securing funding for R&D activity could influence the direction of any business and its projects, so seeking professional advice early in the process can help businesses to plan ahead. Advisers will be able to support manufacturers in preparing a considered R&D Report. This document can help to support their claim by presenting key company information, evidence of how HMRC’s eligibility criteria has been met and justifying the qualifying R&D expenditure claimed. In order to reduce the time involved in making a claim, it may also be possible for tax professionals to collect the necessary information at convenient times, such as during audits or when accounts and tax calculations are being undertaken.
Manufacturers adopting a problem-solving approach to reducing their carbon footprint and innovating sustainable products should avoid missing out on R&D tax relief. By carefully researching HMRC’s criteria and seeking professional advice, manufacturers can improve their chances of making a successful claim and improve their cash position as a result.
Anthony Lalsing, tax director at accountancy firm, Menzies LLP is a specialist in innovation and R&D
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