Fuelling the energy transition: leveraging R&D tax relief for UK innovation

The UK’s oil and gas sector has a long history of operating in the North Sea, but it must adapt as global opinion on fossil fuels and their environmental cost changes. Significant change is needed to achieve the desired energy transition, which must be supported by the government in a way that utilises and preserves the job and skill base present in areas such as Aberdeen.

According to the OEUK, ‘the UK’s world class oil and gas sector has reduced emissions by 24 per cent since 2018 and we must build our low carbon future on this achievement.’ This statement showcases the strength and capability of the UK’s oil and gas sector. The next government must continue investing in and supporting this key industry. However, it needs to strike a balance between the drive to reach climate targets and the need to retain jobs and skilled labour in the UK economy and its local communities.

The energy transition can be directly supported through innovation efforts via developments in technology and processes to increase efficiency, digitalisation and reduce emissions. Although the UK research and development (R&D) tax relief regime has undergone several changes recently, it is still well placed to continue providing benefits to qualifying R&D conducted by UK companies.

Regime changes

HMRC has introduced a number of significant changes to the R&D tax relief regimes.

• Introduction of the additional information form: this creates the need for an increased level of detail and information to support and describe the activities being claimed for.
• Changes to the rates of relief: this is observed through changes in the rates of relief applicable to the Small and Medium-sized Enterprise (SME)* and R&D expenditure credit (RDEC) regimes, respectively. 
• Introduction of the merged scheme and SME R&D intensive regimes**: this applies from 1 April 2024 onwards, where all claimants will claim through the merged scheme unless they qualify for the SME R&D intensive regime.
• The benefit under the merged scheme is 15% net, and under the SME R&D intensive regime is 26.97% (if losses surrendered).

*A company is entitled to relief under the SME regime if it, together with its partner and linked enterprises, has fewer than 500 full-time equivalent employees and has a turnover of less than €100m and/or total assets (before liabilities) of less than €86m.

**A company is entitled to relief under the SME R&D intensive regime if it is a loss-making SME whose relevant R&D expenditure equates to 40% of its total expenditure, or 30% of its total expenditure (from periods beginning on or after 1 April 2024).

Impact of these changes

Overall, these changes will make it less beneficial for SME claimants, but the merged regime does include some of the more lucrative rules that were previously part of the SME regime. The introduction of the SME R&D intensive regime, which is aimed at loss-making SMEs, can also increase the benefit received for SME claimants, as well as the range of potentially eligible claimants.

The SME R&D intensive regime is likely to be most beneficial for high-risk tech and science start-ups or university spinouts, or where there is a long payback time on the company’s R&D work progressing to commercialisation.

There has been a significant increase in the number of enquiries opened by HMRC. It is currently widely estimated by advisers and consultants across the industry that one in five R&D tax relief claims result in an HMRC enquiry. Although enquiries can be frustrating and discouraging to claimants, our internal enquiry support team is well placed to manage enquiries and achieve an agreeable outcome for all parties.

Driving innovation to support the energy transition

Within the UK economy, the oil and gas industry boasts a strong foundation of technical knowledge and skills.

Our team of R&D experts can help oil and gas businesses access this valuable tax relief, which they can reinvest to support their innovation efforts. We currently identify the following key areas of innovation within the oil and gas sector that can benefit from R&D tax relief.

• Development of innovative and more efficient devices, equipment, and technologies to support essential oilfield service processes, such as remote monitoring and control systems.
• Prototyping and field trials of innovative subsea robotics, well intervention systems, or underwater inspection tools to improve the operation and asset integrity of subsea infrastructure.
• Digital transformation of upstream and downstream facilities, processes, and operations through the development of advanced data algorithms, predictive maintenance, and digital twins testing capability.
• Improving the economic feasibility of ageing North Sea assets through the development of more advanced drilling technologies, oil recovery methods, and reservoir management processes.
• Development of blockchain-based supply chain solutions to improve transparency, traceability, and efficiency across supply chain processes.
• Improving the economic feasibility of Carbon Capture, Usage, and Storage (CCUS) and other environmental solutions such as green hydrogen.

However, this is not an exhaustive list, and there is a wealth of innovation and advancement currently being undertaken and investigated by the diverse range of companies in the UK oil and gas industry. Additionally, the oilfield service and supply chain companies supporting the wider North Sea oil and gas industry are of equal importance in achieving the energy transition and driving innovation.

Conclusion

Grant Morrison, RSM UK’s head of oil and gas, comments:

‘On a daily basis, we see how the R&D tax relief regime can support both the upstream and oilfield service sectors with the energy transition. However, at the same time, the additional tax burden and uncertainty created by the Energy Profits Levy can be an obstacle to innovation and the energy transition. The juxtaposition of the effects of the R&D tax relief regime and the Energy Profits Levy demonstrates the uncertainty experienced across the sector, highlighting the need for a more cohesive government strategy to support the UK’s oil and gas sector and the energy transition.'

Dougy Agnew, R&D tax partner, comments:

‘The upcoming election creates some uncertainty around government policy but we believe the current outlook for the UK R&D regime is still positive and can continue to be a beneficial support system for qualifying UK businesses conducting eligible R&D. We are in regular two-way communications with HMRC, who are actively looking to improve the regimes and to continue support for innovative UK companies.’

How we can help

At RSM, we have a team of R&D experts with a combination of technical and tax backgrounds, including relevant technical degrees and industry experience. Therefore, we are well placed to identify and support R&D tax relief claims across a range of sectors, and to help UK businesses and multi-national groups navigate the recent regime changes.

Our innovations relief team collaborates across the UK and our international network. We work closely with our wider specialist teams, including transfer pricing, capital allowances, payroll and global employer services, to deliver the most effective solution for our clients.

To discuss the potential benefits of R&D tax relief for your business, please contact Grant Morrison or Dougy Agnew.