Is there tax relief for energy intensive industries?

Is there tax relief for energy intensive industries?

Putting aside the consequence of war, the morality of energy profits and politics for that matter – the commercial reality of the current energy crisis exists as global energy prices soar.

For energy intensive industries there is some help available in the form of tax reliefs and grants. For example, government schemes, the BEIS green energy grants, net zero incentives through Innovate UK competitions and the sterling work of @Made Smarter and there is also R&D tax relief.

In this blog, we'll cover some of the help that may be available to help you through these very challenging times.

The energy crisis was predicted

Rising energy costs has been an agenda point since the world re-emerged from the global pandemic. “Project Shine” think tank early warned back in November 2021 of a potential post Covid era energy crisis.

For energy intensive businesses and key industries such as manufacturing, there was already news coming out of Europe from early September of winter shut downs in an attempt to lower energy costs etc.

Throughout the late summer and early September news from Europe speaks of French glass manufacturing planning to shut down furnaces between November and March 2023. The news from Germany is that many manufacturers have halted production altogether.

Energy intensive industries are having to look closely at production costs, their energy usage, the competitive business environment, energy suppliers and their competitive future.

The monthly magazine, The Engineer UK, ran a poll of British manufacturers in weeks 2 and 3 of September asking the question: What government support would be most useful in terms of helping the UK manufacturing sector meet its spiralling energy costs?

A resounding 77% responded as follows:

• An energy price cap for businesses 60.23% 
• Tax breaks for energy intensive industries 17.05%

How are energy bills affecting businesses?

Haines Watts speaks to SME business owners on a daily basis (in good times and bad).

We represent over 35,000 SME businesses across the UK. As a business owner and R&D tax specialist, I speak to a minimum of 10 manufacturing and engineering fellow business owners per week. There is mixed reaction to the temporary 6 month sticking plaster “Energy Bill Relief Scheme (EBRS) for non-domestic customers” .

In @Russ Cockburn’s recent post, one of our clients MD @NeilClifton of Cube Precision Engineering commented “Without intervention, our energy bills were due to rise from £12,000 in August 2021 to a massive £44,000 this year based on a similar level of consumption.

On top of lots of external pressures, inflation and supply chain disruption, this would have been the last thing we needed, especially as we are trying to make the most of lots of exciting new opportunities.

In fact, our tooling expertise has been in significant demand from the automotive and aerospace sectors, providing us with the largest order book in our history.” Other commentary in the article was pessimistic.

There are always two views of any challenge: opportunity and threat. Don’t get me wrong, the recipe is there for a perfect storm; logistics problems, reshoring, skills shortage, pandemic, materials prices and now energy crisis. In one conversation in late September the additional cost to keep a UK foundry in operation will be £1million.

Despite that some of my traditional manufacturers of metal-based componentry (and Cube Precision Engineering above) can hardly keep up with order demand.

What energy tax relief is available?

So, in these challenging times, what assistance is out there?

There is the BEIS raft of green energy grants, net zero incentives through Innovate UK competitions and the sterling work of @Made Smarter (50% matched funding and technology advice) and a number of other schemes available.

Below there are other schemes to consider also:

EII Exemption scheme

What is the EII exemption?

The Energy-Intensive Industries (EII) Exemption Scheme was rolled out by the UK government between 2017 and 2018 to replace the EII Compensation Scheme. It excludes qualifying businesses from the higher energy costs associated with renewable schemes put in place by the government to achieve its 2050 zero carbon emissions goal.

Unfortunately, the costs that fund these schemes, whilst fronted by energy suppliers, ultimately fall on energy-intensive businesses in the form of inflated energy prices.

This makes the EII Exemption Scheme a valuable tool for energy-intensive businesses competing in the global market.

The government has launched a consultation into support scheme for energy intensive industries including steel, paper, glass, ceramics, and cement. Targeted proposals could mean energy intensive industries receive even more relief on their electricity bills.

This consultation follows April’s announcement that the Energy Intensive Industries Compensation Scheme has been extended for a further 3 years, with its budget more than doubled.

Climate Change Levy (CCL)

The Climate Change Levy is an environmental tax charged on the energy that businesses use. It’s designed to encourage businesses to operate more energy efficiently as well as helping to reduce their overall emissions. 

The CCL applies to businesses in the industrial, public services, commercial and agricultural sectors, and is charged on ‘taxable commodities’ for heating, lighting and power purposes.

CCL is paid at either the main rate or carbon price support (CPS) rate.

How can R&D tax credits relieve energy price hike for firms?

There is also R&D tax relief (the thing that gets me out of bed every day with a spring in my step):

Very relevant and interestingly can take an apportionment of utility overheads (heat, light and water) on a headcount pro-rata basis, on an actual facility cost basis, on a floor space apportionment or as a combination of all these techniques for the best outcome on a just and reasonable basis (you’ve got to love the greyness of guidelines at times like these).

How we helped with claiming R&D

Case Study: Here at Haines Watts, we support strategic industries and energy intensive industries such as manufacturers in good times and bad.

Here's an example of how claiming R&D tax relief can help alleviate rising energy prices:

A Powder Coating treatment factory engaged in qualifying R&D activity with leasehold additions of £178,000 to accommodate R&D activity.

Current Power bill £176,656.

Even taking the lower end of soaring prices (range 250% to 400%)

New Power bill £176,656 x 250% = £441,640 (This is many SME's profits or more, in this case it is 52% of the company's profit).

12% Staff deployment in the R&D effort

Total wages of £1,594,000 (rising also)

Modest consumed materials (rising also) and subcontractor costs.

One year's R&D tax relief claim could yield in the region of £95,300 cash which equates to 36% of the above energy price hike of £264,984.

If you are an energy intensive industry and you haven't considered R&D tax relief before, it is worth exploring if any of your business activity will qualify and if you would be eligible for R&D tax relief by speaking to a tax relief expert.

FAQs

Which industries are energy-intensive?

Energy intensive industries refer to industrial sectors – usually manufacturing industries – that are high users of energy. For these industries energy costs are often a high proportion of their production costs.

These sectors are diverse in their energy consumption in terms of energy sources (electricity, gas or other fuels) and volumes used.

CONCLUSION

With economic uncertainty here in the UK, logistics problems, re-shoring, skills shortages, increasing materials prices and now the energy prices reaching record highs, there is a huge amount for business owners in these energy intensive industries to think about.

But there may be ways for you to get help with energy bills and to look at other tax reliefs available that may help you to fund your future energy costs.

Contact us if you want to know more about how we can advise and support you and how we can help your company hedge against stacked odds.