Tax Benefits And Loans – Support From Government

[Derek_Parkinson]

Government support in the form of funding is essential if the UK is to make the transition to a low carbon economy. At a time of tightened reins on investment and concerns about cashflow, help for companies to invest in low carbon technologies and processes is more important than ever.

The Budget of 2009 made available £405 million to support low-carbon energy and the green manufacturing sector, but this is earmarked for accelerating the development of new and emerging technologies. Most British companies faces a different challenge – removing emissions from existing products and processes by improving efficiency and investing in new technology, a significant hurdle as we emerge from the recession into a world of new regulations and rising carbon costs.

In this article we will look at the government support for companies across all sectors in meeting this challenge. For these government support is available in two main ways – tax relief and interest-free loans. The latter is aimed primarily at supporting SMEs and large companies not already participating in the Carbon Reduction Commitment Energy Efficiency Scheme (CRCEES). The loan scheme, which is managed by the Carbon Trust, received a further £100 million of new funding as part of the 2009 Budget.

Loans for low carbon

Although it may not affect large companies directly, this scheme could help to boost turnover for those that sell to the SME market. Due to EU rules on state aid the loans are generally not available to the transport sector, companies producing agricultural or fisheries products, or for export related activities. Otherwise, they are available to:

• Companies with up to 250 full-time employees and an annual turnover not exceeding £43m and/or an annual balance sheet total not exceeding £37m.

• Companies of any size with an annual electricity spend of less than £500,000, that do not qualify for CRCEES

Companies must have been trading for at least 12 months, and pass a credit check by the Carbon Trust. Successful applicants can borrow between £3,000 and £500,000 interest-free, the size of the loan and its repayment period determined by a Carbon Trust assessment of projected emission cuts.

The loans may be used to purchase a range of technologies, such as those for regulating the temperature, lighting and power supply in buildings, or for compressed air and pipe fittings, boilers and motors, for example. At the time of publishing, the Carbon Trust was unable to supply Low Carbon Board Report with figures for the take-up of these loans to date, but it estimates that around 3,000 businesses could benefit.

Two types of tax relief

The Government also aims to offer indirect financial incentives through the tax system. A notable example is the Research and Development (R&D) Credit scheme, which although aimed at R&D quite generally is also relevant to emissions reduction. The credits are available either as a tax deduction based on R&D spending, or in some cases loss-making SMEs can surrender their losses in return for a cash payment.

Detailed guidance on what counts as R&D for tax purposes was set out by the Secretary of State for Trade and Industry in 2004, but a rough approximation is work to resolve scientific or technological uncertainty for the purpose developing new or improved products, processes and services. The Government offers the following neat summary: “If it's obvious to a professional how to do something, doing it isn't R&D. If there is a 'non-obvious' scientific or technological problem around how to do something, then doing it is probably R&D.”

Industry response has generally been positive. In a report published in February 2009 the CBI noted that savings on R&D costs delivered by the tax credit now average 8%, with SMEs saving 10.5%, medium-large companies 8.5% and large companies 6%. Some 37% of companies surveyed increased R&D as a result of having access to the credit, while 75% of respondents said it helped to maintain their R&D investment in the UK.

A more nuanced picture emerges for the other main arm of tax policy in this area – the Enhanced Capital Allowance scheme (ECA). Introduced in 2001, ECA is specifically aimed at increasing investment in low carbon, energy-saving equipment. Open to all businesses that pay UK corporation or income tax, regardless of size, sector or location, ECA provides 100% first-year capital allowances on investments in energy-saving equipment against taxable profits of the period of investment.

An important restriction is the equipment that qualifies for ECA, an issue decided by the Carbon Trust. How successful has ECA been in terms of take-up? A study carried out by Bristol Business School in association with Smith & Williamson in 2007 suggested low take-up, at that time at least.

Need for awareness and simplicity

The study, which questioned 86 Financial Directors, found that less than 50% of businesses were aware that these allowances even existed. Of those that knew of ECAs but failed to take advantage of them, 50% believed that the allowances were “not relevant”, 37% stated that this type of investment was “not a priority for their business”, while 13% said they had been discouraged because the process was “too complex”.

“In my experience people are more enthusiastic about the R&D Credit, but that has been around longer and people are more used to it,” says Helen Devenney, chair of the Environmental Taxes Working Group at the Chartered Institute of Taxation. “Typically it is used to fund large discrete projects, and can be absolutely essential in helping a large company that could work in other countries to decide on the UK.”

In this respect, the R&D Credit and ECA are not easy to compare – the first is likely to be used to fund large-scale projects to develop new products, while the second covers existing products purchased or replaced on a fairly regular basis. But for that reason it is important that ECA can be integrated easily into “business as usual” for a company, and this may be where problems occur.

“I suspect that in practice ECA could be a headache for companies to claim, if you decide on a product, then have to go through the list [maintained by the Carbon Trust], and then find that the manufacturer isn't on it, for example. It could require a lot of manpower and the tax department may not be set up to do it, particularly if there is a lot of purchasing going on across a large organisation – ECA should be simple to claim.” says Devenney.

Key questions:

• How well aligned are our procurement policies with our low carbon strategy?
• How does our tax department contribute to our strategy?
• Have we explored ECA and its relevance to our business?