In March the Chancellor announced £1 billion of grant funding available through the Net Zero Innovation (NZIP) Portfolio, though this Fund replaced the pre-existing BEIS Energy Innovation Programme. NZIP targets funding at technological advancements to aid decarbonisation and is therefore a key part of the UK’s net zero targets. Funding for research and development (R&D) is incentivised because it is good for employment, keeping jobs in the United Kingdom, and because it means new technologies are developed locally and can be exported growing the overall economy.
Tax credits for R&D activity have existed for years, see our previous Spotlight On article here. For small companies this represents a tax deduction of £2.30 for every £1.00 spent on R&D and is therefore extremely valuable to businesses undertaking such activities, which are regularly pre-revenue.
The Chancellor should utilise the existing system for claiming credits for R&D activity but offer increased deductions for those businesses solving technological challenges that could result in the reduction of carbon emissions, for example those which increase battery life, capture carbon from the atmosphere or generate energy from renewable sources. Enhancing the available reliefs for expenditure in this sector is well justified given both the very limited time to make meaningful changes to tackle the climate crisis and the potential economic benefits to the UK.
Trillions of dollars are estimated to be needed each year to keep the rising average global temperatures below 2 degrees Celsius above the pre-industrial era equivalent. The size of the green technology economy is therefore enormous and any country which can establish itself as a centre of excellence in making technological advances that reduce carbon emissions can a) create large numbers of local jobs and b) generate revenues from the available funding of overseas governments. Unfortunately, instead of additional incentives to address the climate crisis, £35 million a year is being taken out of available Government funds through cuts to Air Passenger Duty.
Utilising the existing system to incentivise green technology also helps to avoid further complicating an already unwieldy UK tax environment. Further opportunities exist, for example offering additional deductions to investor reliefs in early-stage business – the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – see our previous article here. Such reliefs would be well targeted as early-stage businesses are often at the forefront of technological advancements as they are setup with this very purpose. Investors are attracted by the potential for high returns if the developed technology proves successful. However, investment of this nature is also risky as technology can fail or be quickly superseded. Reliefs available under these schemes encourage investors to take risks with their capital and therefore targeting these reliefs at the UK’s net zero target would be a good use of taxpayers’ money.
If you are developing new technologies and are interested in how we can help in taking advantage of research and development tax incentives, or any other elements of this article, please speak with your usual Blick Rothenberg contact.
You can also visit our COP26 Hub where we will share an article written by our experts each day the COP26 conference takes place with a focus on green taxation.