The UK’s renewable energy sector continues to adjust to the post-subsidy environment. The ending of onshore wind farm subsidies in 2016 and the closure of the renewables obligation (RO) mechanism for new solar capacity a year earlier has significantly affected financing within the sector. Earlier this year it was reported that investment into these areas of renewable energy fell by 56 per cent in 2017.
With the last Budget ruling out any fresh support for the sector before 2025, it’s more crucial than ever for operators to leverage other means of government support. For some companies, research and development (R&D) tax credits could offer a helping hand when they most need it.
Introduced by the UK Government in 2000, R&D tax credits have been an excellent measure in driving forward competitiveness in British business by incentivising companies to invest in innovation in return for tax breaks. For every £100 of qualifying R&D expenditure, relief is available at £25.00 for profit-making SMEs and at £33.35 for those making a loss.
Many wind and solar energy businesses push technological boundaries on a daily basis. Whether it’s prototyping, development or experimentation with materials or physical production processes, there’s a wide variety of disciplines involved in advancing the science responsible for energy production, all of which could qualify for substantial tax rebates.
In our extensive experience working within the renewable energy sector, however, we have found that many businesses appear to be missing out. Renewables companies are spending staggering amounts on developing new technologies yet only a small portion are claiming the R&D tax relief benefits – which could be worth hundreds of thousands of pounds – that they may be entitled to.
In this currently challenging financial climate, I believe there are a significant number of wind and solar energy businesses which could benefit from this incentive by either reducing their tax bills or, in some cases, securing a tax repayment.
Determining what exactly qualifies as R&D expenditure usually requires expertise of HMRC’s rules. Companies investing in qualified staff who are seeking to solve what at first appears to be an un-solvable problem to improve their product or service offering could find that they are eligible. Those which do qualify can leverage the scheme to secure tax relief on day-to-day costs and expenditure, including staff, subcontractors, materials, software and utilities.
Examples of wind energy businesses making successful R&D tax relief claims include those whose investment in innovation led to them meeting higher efficiency targets. This included companies which were able to safely enhance the yield of their turbines as well as those which advanced the design of their rotor blades to improve reliability, structural resistance, aerodynamic properties and noise-related performance.
Meanwhile there are great examples of R&D-focused innovation going on within solar energy businesses which also qualifies for tax credits. This included companies which were able to enhance the yield of their solar panels, decrease losses in regulators and converters, increase the efficiency of monitoring tools and better manage storage technologies, such as battery packs, for off-grid applications.
While they can prove financially benefit, there are challenges in submitting a successful R&D tax relief claim. It is vital to separate the routine parts of a project from the non-routine, especially when dealing with large, high-value, complex ‘first-in-class’ items. These may entail a significant level of innovation, sometimes involving several projects. It is, however, unlikely the entire build costs will qualify for R&D tax relief. It’s therefore important for companies to identify and assess which parts of the ‘first-in-class’ items contribute towards eligible expenditure, seeking professional help where it is required.
For companies which don’t have the internal expertise and resources, working with a specialist adviser can help them ensure they claim in the most efficient way possible and avoid the potential of HMRC censure for an inaccurate claim. An experienced adviser can also help a business learn how to make the best use of the scheme going forward.
Whichever route is taken, it is vital for renewables businesses to demonstrate which of their activities qualify for R&D tax credits and how this will open up a new revenue stream to fund further innovation-focused projects going forward.
The new subsidy-free landscape has created some major issues for wind and solar energy businesses. For those which qualify, R&D tax credits have the potential to deliver a financial boost across the sector and help ensure companies can not only survive but also continue their on-going investment to ensure they are world-class.
Scott Henderson, Managing Director at R&D tax relief specialist Jumpstart