Easing the burden
Capitus director Aubrey Calderwood offers edie users a guide to sustainable and renewable tax incentives that could help your business save money and grow
The Government has, in recent years, introduced a range of measures to encourage businesses to become more sustainable. Not all of these measures have been received positively by industry, particularly as some involve unwelcome additional costs to businesses.
However a range of tax incentives exist which should be positively welcomed by the environmental and waste sectors. These tax incentives can help you achieve sustainability targets, whilst saving your business considerable amounts of money by reducing the amount of tax it pays.
So what are these tax incentives and how, in practice, can they make a difference? Let's consider the three most relevant tax relief schemes to this industry, and look in turn at practical examples of how they can save your business money.
Enhanced Capital Allowances
Enhanced Capital Allowances (ECAs) were introduced by the Government to encourage businesses to become more sustainable. They give 100% up-front tax relief for companies investing in energy and water efficient technologies to heat, light, ventilate and save water in buildings. What this means is that any business installing any such qualifying technology in buildings can claim back 100% of the cost of the new technology against their tax bill that year.
Green Co Ltd spends £150,000 installing an ECA-qualifying heating and ventilation system in its premises. The company could claim back the full £150,000 cost against their tax bill that year meaning a tax saving of £39,000 (for a 26% corporation tax payer) and a net cost in year one of £111,000. On the other hand if the company had chosen instead to install a non-ECA qualifying system, only 8% (from April 2012) of the cost could be claimed against taxable profits in the year that the system is installed, producing a tax benefit of only £3,120 and a net cost of £146,880 in year one.
The list of qualifying technologies is long and includes, for example, rainwater harvesting equipment, water-efficient toilets and taps, combined heat and power systems, ground/air source heat pumps, solar thermal systems and biomass boilers, with output ranging from small scale right up to large energy from waste plants. More information is available here.
The list is evolving and last year was updated with consideration for feed-in tariffs and renewable heat technologies.
The benefits of the ECA tax scheme are not limited to businesses installing such technology, but also apply to the manufacturers of energy/water efficient technologies.
For businesses that install energy/water-saving technologies there are the obvious benefits of reduced running costs, which can reduce the payback period of the technology compared with less sustainable alternatives. When you add to this the 100% tax relief available through the ECA scheme it often makes choosing 'green' technology far more cost-effective.
For manufacturers of energy/water-efficient technologies, ECAs are a customer benefit not to be underestimated. Often 'green' technology is perceived as being more expensive than less green alternatives - the so-called 'green premium'. However, when you take into consideration the 100% up-front tax relief available it often makes installing such technology a cheaper option than less sustainable options, notwithstanding the reduced running costs.
Manufacturers of sustainable technologies should make sure their products are on the ECA approved technology list and educate their sales teams of the benefits to customers of ECA-qualifying technology.
Research & Development Tax Credit
Research & Development tax credit is, from April 2012, a 225% tax relief available to small and medium sized enterprises investing in R&D of any type. The definition of 'R&D' for tax purposes is not, as many people believe, restricted to scientific or high-tech projects. As such, many more companies in the waste/environmental sectors could be claiming this highly valuable tax relief, for example for the development of new waste treatment or recycling processes and equipment or the development of new sustainable technology.
Sunnyskies Ltd invests £50,000 developing a new range of solar PV roof tiles. R&D tax relief would allow Sunnyskies Ltd to reduce its tax bill by £100,000 (£50,000 x 200%) that year giving the company a tax saving of £26,000 (to a 26% corporation tax payer). Importantly, if Sunnyskies Ltd wasn't making profit (i.e. perhaps a start-up business) it could elect to take a tax credit instead of 12.5% - in this example it would mean a payment from HMRC of £12,500.
Importantly if you didn't claim R&D tax relief for a project you undertook in the last 2 years, you should still be able to make a retrospective claim. For large companies, R&D tax relief is available at the lower rate of 130%.
Land Remediation Relief
Anyone who's ever been involved in remediating contaminated land will know that it can be an extremely costly exercise. We regularly meet land owners who haven't remediated sites they own because they think it's going to be so costly that it will undermine the financial viability of the development.
However, Land Remediation Relief (LRR) is a 150% tax relief which exists to help land owners shoulder the cost of bringing brownfield land back into a commercially usable state.
Recycle Ltd wants to build a new recycling and waste treatment facility on the site of a former chemical plant. The site has traces of arsenic and requires the removal of metal pilings and concrete foundations. It is also extensively infested with Japanese Knotweed. The remediation costs are estimated at a hefty £650,000 which Recycle Ltd considered an unavoidable cost coming straight off the bottom line profits of the project. However, with a claim for LRR the £650,000 cost becomes a tax deduction of £975,000 (£650,000 x 150%), providing a £253,500 saving for a 26% corporation tax payer.
Importantly, if Recycle Ltd does not have taxable profits at the time remediation is undertaken, the company can elect instead to take a tax credit of 16%, worth £156,000 in this example.
If you have previously undertaken a remediation exercise and did not claim LRR, all is not lost. It is possible to make retrospective claims up to four years from the end of the accounting period in which the expenses were incurred.
There are other tax allowances which may be relevant to your business and therefore it's important to obtain professional advice in this regard if you are to maximise the tax savings. All too often claiming tax relief is considered to be a post-project financial sweeping up exercise carried out by accountants after the project is finished. The reality is that few accountants have the property-expertise required to extract the maximum allowances, so it is worthwhile consulting a capital allowances specialist in this regard.
With even a basic knowledge of the tax reliefs available and some pre-design tax planning, companies could be shaving considerable sums off their annual tax bills. By cutting tax bills, businesses would have more money to reinvest in technology and processes, making them more efficient and potentially giving them an edge over competitors. A winning result all round.
Aubrey Calderwood is Director of investment incentives consultancy Capitus.