R&D tax credits for cleantech and energy

Cleantech and energy companies carry two features that shape their R&D claims: development cycles that run from laboratory to pilot plant over several loss-making years, and grant funding at almost every stage. Both are now well served by the current schemes, and both are still widely misunderstood because most online guidance describes rules that no longer exist.

What counts as qualifying R&D in cleantech and energy?

Work seeking an advance in the field through uncertainty a competent professional could not readily resolve. At concept level, that regularly includes:

• Energy storage development: cell chemistry, battery management, thermal behaviour and degradation under real duty cycles.
• Hydrogen production, storage and handling, including electrolyser efficiency and materials work.
• Grid and demand-side software resolving genuine uncertainty in forecasting, balancing or control at scale.
• Marine, wind and solar component engineering for environments where published performance data runs out.
• Carbon capture, heat recovery and process electrification, where conversion efficiency or materials behaviour cannot be deduced from existing knowledge.
• Scale-up from bench to pilot, where behaviour at volume cannot be reliably predicted from laboratory results. Scale-up qualifies while technological uncertainty persists; routine capacity expansion does not.

The advance need not be a new product. A project seeking an appreciable improvement to an existing process through scientific or technological changes is R&D (paragraph 9(c)), and an advance may have tangible consequences, such as a process which generates less waste, or intangible ones, including cost improvements (paragraph 7). Efficiency work sits squarely inside the definition, provided the improvement comes from scientific or technological change and is more than routine upgrading (paragraph 23).

When does scale-up from bench to pilot qualify?

While the uncertainty is live, and no longer. The Guidelines are direct: uncertainty will often arise from turning something already established as scientifically feasible into a cost-effective, reliable and reproducible process (paragraph 13). An electrolyser stack that holds its efficiency at 5kW and loses it at 500kW, a chemistry that degrades differently once packs are cycled at grid duty, a capture solvent that fouls at pilot residence times — each asks whether and how the thing can be built and run, which having made it work on the bench does not settle.

Two paragraphs govern the demonstrator itself. The design, construction and testing of prototypes generally fall within the scope of R&D; once modifications reflecting the test findings are made and further testing satisfactorily completed, the uncertainty is resolved and further work is not R&D (paragraph 39). Construction and operation of a pilot plant is R&D while its operations are being assessed, until the uncertainty associated with the intended advance is resolved (paragraph 40). Failed trials and scrapped demonstrator builds still count: the relief follows the attempt to resolve the uncertainty, not the outcome.

Does grant funding reduce the claim?

No. Under the merged scheme and ERIS, grant funding, including Innovate UK awards, no longer blocks or reduces relief. The old subsidised-expenditure rules are abolished. Advice built on the old SME rules costs cleantech companies real money: our grants page sets out the current position and covers the old rules only for backdated claims, and the sector application is worked through in Innovate UK grants and R&D tax relief together.

Which scheme fits, and what is it worth?

On the standard worked example of £100,000 of qualifying spend:

Pre-revenue developers should start with ERIS and check the 30% ratio with the intensity calculator, on figures that include connected companies. The denominator is the company’s total relevant expenditure — broadly the trading costs in its accounts for the period, not just the R&D ones.

Payable credits under both schemes are limited to £20,000 plus 300% of relevant PAYE and National Insurance, which a small team running a largely subcontracted demonstrator programme can reach. Under the merged scheme any excess carries forward as a credit for the next period. Under ERIS the credit does not carry forward. Only the loss you decline to surrender survives, so size the surrender to the cap before filing. See the PAYE cap and, if the position is unclear, which scheme applies.

Which costs carry a cleantech claim?

Staff costs apportioned to development time, covering the engineers and technicians running rigs and trials as well as the design office. Agency staff enter as externally provided workers at 65% for unconnected providers, and only where the workers are within UK PAYE and Class 1 National Insurance; subcontracted development enters at 65% for unconnected parties. Connected parties are restricted instead to the lower of the payment and the other party’s own relevant expenditure.

Consumables carry real weight here. Feedstocks, electrolyte, membranes, catalyst and electrode materials, cells and prototype components used up or transformed in the R&D qualify, as do the light, heat, water and power the R&D itself consumes — a meaningful figure when rigs cycle packs or run stacks for months. Apportion on rig hours or metered load rather than a round percentage of the site bill. One rule needs settling early on demonstrators that export: where consumables are absorbed into something sold in the ordinary course of business, their cost falls outside the consumables claim, and a demonstrator producing saleable power, heat or hydrogen raises exactly that question. Software, data and cloud costs for simulation and modelling can qualify, apportioned across mixed use: see which costs qualify. Pilot plant spend needs splitting carefully — revenue costs of resolving uncertainty can qualify, while rent and rates never do, and capital expenditure sits outside R&D tax relief but may attract R&D allowances.

What does not qualify?

Deployment. Installing commercially available panels, turbines, heat pumps or battery systems is engineering and project management, however much carbon it saves, and it is not R&D: deploying existing technology in a new context with only minor changes is not an appreciable improvement (paragraph 24). The same applies to a proven process replicated at a second site.

Paragraph 14 draws the line the rest follows: improvements, optimisations and fine-tuning which do not materially affect the underlying science or technology do not constitute work to resolve scientific or technological uncertainty. Commissioning a plant to the supplier’s specification, tuning a control loop back into a range it has held before, and routine capacity expansion all sit outside. Planning, consenting, environmental impact assessment and grid connection work are regulatory and commercial activity, not R&D — though feasibility studies informing the strategic direction of a specific R&D activity are a qualifying indirect activity (paragraph 31).

Sector points worth knowing

• Consortium projects raise the contracted-out question: whether the customer intended or contemplated R&D of the sort actually undertaken, which HMRC reads as needing a specific appreciation of what R&D will be done, and therefore the ability to understand and specify it, rather than mere awareness that some R&D will happen.
• Offshore and overseas testing needs checking against the overseas restrictions: for accounting periods beginning on or after 1 April 2024, conditions necessary for the R&D must be absent in the UK, present where the work is done and wholly unreasonable to replicate here; environmental and geographical conditions can support that, while cost and worker availability are expressly excluded.
• First-time claimants, and companies that have not claimed in the three years ending with the notification deadline, must watch the claim notification deadline: six months from the end of the period of account, or the claim is invalid however strong the engineering.
• Bioenergy and controlled-environment work overlaps agritech, which we cover on its own page.
• Cell, module and pack production at volume raises the same questions as manufacturing process development; forecasting and control software overlaps AI and robotics.

What evidence does a cleantech claim need?

Test programmes generate it as a by-product, which is this sector’s advantage. Rig and cycling logs, degradation and efficiency curves across duty profiles, design-of-experiment matrices, commissioning records showing which parameters were unknown going in, failure and root-cause reports, and the technical reporting already prepared for grant funders all serve. A performance curve that refuses to hold at scale evidences an unresolved uncertainty better than a narrative written after year end. Tie the records to a project boundary with a stated advance and uncertainty, and give the time apportionment a basis: HMRC accepts an estimated proportion of known expenditure where the estimate is arrived at using evidence and reason, with the methodology recorded, and rig hours usually supply it. Write the Additional Information Form, mandatory since 8 August 2023, from those records rather than from memory.

Talk it through with a chartered adviser

LimestoneGrey is a firm of chartered tax advisers and chartered accountants specialising in R&D tax relief, regulated by ICAEW. Every claim is signed off by a chartered adviser, with enquiry support included as standard and the fee agreed before work starts. HMRC checked around one in six claims in 2023-24, its latest published figure, so pilot and demonstrator work is best documented while it runs — see HMRC R&D enquiries for what a check involves.

If your company is engineering the energy transition, a short scoping call will give you a straight view on eligibility, scheme fit and the grant position. Call 0330 223 4 223 or send us a message.

Sources

• Guidelines on the meaning of R&D for tax purposes — paragraphs 7, 9(c), 13, 14, 23, 24, 31, 39 and 40.
• Check what R&D costs you can claim — cost categories, consumables including fuel, power and water, the 65% rule, and the exclusion of capital expenditure, land, rent and patents.
• R&D tax relief: the merged scheme and enhanced R&D intensive support — the 20% credit, the ERIS conditions and the PAYE cap.
• CIRD161000 — the intended-or-contemplated test; CIRD151000 — the s1138A(3)(a) overseas conditions; CIRD151100 — the s1138A(3)(b) exclusion of cost and worker availability.
• GfC3: Recommended approach to claims and record keeping (part 5) — HMRC on estimates arrived at using evidence and reason, and on recording the methodology.