Energy costs and tax reliefs for energy efficiency

The British Chambers of Commerce survey for Q4 2021 of 5,500 firms, reported that two-thirds of them cited inflation as a concern, a record high, so our clients are not alone in this.

The increase in the price of raw materials is largely about energy prices with wholesale gas prices in particular soaring.  Whilst energy prices tend to be volatile, the Ukraine crisis has made them more so. Most commentators think that energy prices are likely to remain high in the coming decade as a result of the energy transition from fossil fuels to renewables.  This, they think, will tighten energy supply whilst global demand is unlikely to fall significantly, so a move to permanently higher energy costs may be one of many changes we are likely to see in the coming years. If so, all businesses need to have a strategy for using less energy with less of it being based on fossil fuels, not only for the sustainability of the planet but the financial sustainability of the business. So how do we use less and are there tax reliefs to help us with any investment costs?

The super-deduction for capital investment (available to corporates until 31 March 2023) and R&D tax credits can provide real help for companies that are working out new strategies to increase energy efficiency. Super-deduction can be used for investment in a new plant or machinery that is more energy-efficient, for example, new energy technologies such as solar thermal, battery storage, or ground or air source heat pumps. R&D tax credits, since they apply to expenditure related to trying to solve a scientific or technological challenge, may be available, for example, to help fund the development of digital tools for driving out energy inefficiency from your business.

Many are advocating the continuation of the super deduction past the current 31 March 2023 deadline to 2030, given the need to invest in clean technologies if the government is to achieve its net-zero ambitions. This creates a slightly tricky issue for companies thinking about investment. If the current super-deduction were to continue beyond 2023 when CT rates go up from 19% to 25% (an increase of over 30%), the value of the investment relief would go up by the same percentage. It would have the same effect on some R&D tax credits. So, do you try to get your investment spend in before 2023 or wait and hope that the relief is continued at a higher rate?

Our guess would be that, were the super-deduction to be continued past 2023, the rate would be reduced to make the amount of tax relief the same under both the 19% and 25% corporate tax rates and that it may be more targeted at certain types of expenditure. However, the Government did withdraw 100% capital allowances for environmentally beneficial allowances in April 2020. Our view is that business should therefore not delay investment in the hope of qualifying for increased tax allowances after 2023. We hope that the Chancellor will give some forward guidance on incentivising the transition to more environmental and energy efficient activity soon.

If you would like to discuss any investment plans you have in order to see what part of the spend may qualify for the super-deduction or R&D tax credits, then please talk to your usual contact or use the contact form below.

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If you would like to discuss any of these issues in more detail, please talk to your usual contact or use the contact form below.

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