Going circular: Make tax work for your business and the environment right now

Liz Gilbert
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Although the R&D tax credit scheme isn't new, it is often overlooked as a way to help businesses adopt more circular business models.
Going circular: Make tax work for your business and the environment right now

Society is facing one of its most significant challenges to date - a rapidly declining environment that can no longer support the way many of us do business. Our take, make, waste approach to designing new products is no longer sustainable. Water, virgin materials and power usage are becoming scarce and scrutiny of carbon emissions impacting the climate is increasing across the globe. As the impacts on the environment continue to affect lives, society will increasingly demand business plays its part – adopting more circular business models, changing the design of materials and packaging, and measuring and reducing their impact.

We hear from businesses that funding these changes can be difficult. Banks are working hard to develop sustainable funding products. A lack of internal expertise means their teams are under pressure to understand and fund investments with improved environmental outcomes. Similarly, independent venture funders and investors are often disincentivised by the perceived risks and increase in uncertainties for returns on novel activities.

The Circular Revolution, a joint report by Grant Thornton New Zealand and Sustainable Business Network concludes Government has a significant role to play in developing tax laws and other regulations which can incentivise the right commercial behaviours. It examines what Government could do to help businesses increase the speed of change towards a New Zealand economy where product circularity, careful use of resources, and lowered emissions are the norm, and to discourage business activity at the expense of the environment. The report states the tax system is an important way to construct the necessary carrots and sticks to achieve this, and recommends some options that could drive meaningful transformation include:

• a scaled tax rate for circular businesses
• an additional tax deduction for companies that participate in lifecycle assessments for their business
• levy the use of virgin materials
• provide rebates to businesses that support environment protection and/or regeneration.

Although these suggestions create opportunities for profound change, it could be some time before we see any radical new legislation on the tax front. However, current tax policy does already provide some opportunity to help manage the cost of transformation.

Research and development (R&D) tax credits

Although this scheme isn’t new, it is often overlooked as a way to help businesses become more circular. It provides real money and value to taxpayers who want to invest in change. If your business is not already making use of these important tax incentives to fund your sustainability efforts, you could be missing out.

R&D tax credits are available to taxpayers undertaking certain activities aimed at producing new or improved goods, services, processes or knowledge.

Looking to develop a more environmentally sustainable version of your existing product? Thinking of entering a new market, and undertaking activities to trial different materials and manufacturing techniques? Trialling options to reduce emissions or more efficiently use water or power in relation to your existing manufacturing processes? Now is the time to assess your eligibility for these credits which are available to businesses resolving scientific or technological uncertainty for the development of new goods, services or processes.

What qualifies for R&D expenditure?

Challenges with transformation projects
Projects that qualify for R&D tax credits may not always be particularly ground-breaking, they can simply be improvements to existing products, services or processes with elements of scientific or technological uncertainty. Take for example, a business wanting to switch to more sustainable materials for their goods. It might experience some uncertainty about which recycled plastic has the right qualities for moulding and how the existing design can be adapted for durability; or the trial process has failed, progress has stalled or failed, or solutions to project challenges aren’t working.

Lack of information for the right solutions
Your efforts to Google solutions have proved fruitless. You have consulted with technical manuals and experienced staff, but a potential solution for your business isn’t achievable without investment in some more research and experimentation to overcome these challenges.

Systematic process
You have some ideas, but no clear path to produce the new goods, services or processes without some trials and possibly some failures. You are thinking of setting out on a path to trial various pre-planned activities to reach a solution. Your business will be working on this problem until you reach a solution (or at the very least exclude all the reasonable possibilities!). This presents a good opportunity to apply for the R&D tax credit scheme.

What’s on offer?

Put simply - a reduction in your tax liability. When a business receives an R&D tax credit, it is still able to take a deduction for the expenses under ordinary tax rules to calculate the overall tax liability. In addition however, where a tax credit is available, the business gets to reduce its tax liability by an extra 15% based on qualifying expenditure, ie, the value it receives is equivalent to the benefit of an additional deduction for over half the total expenditure again. In certain instances under the rules, the credit is even refundable – not just reducing the cash cost of meeting the tax bill, but providing cash in hand to invest in future development.

Who is eligible?

Taxpayer qualifying criteria is broad and includes a diverse size of businesses in almost any type of industry. A business does not need to be in loss or dedicate a minimum proportion of its operations to research to qualify for the tax credit.

Eligible R&D expenditure is capped at $120m on the upper end of the funding scale. There is however plenty of opportunity for smaller players; R&D conducted through certain approved research providers qualify no matter how low the spend, and in all other cases a minimum annual spend (across all projects) of $50,000 will qualify. And it doesn’t matter if the expected returns are difficult to quantify and demonstrate, or the timeframes for return may be uncertain.

Many businesses who at first blush think they are below the threshold, may find they actually qualify when they account for all the resources needed for the project. Qualifying expenditure can include not just material costs, and the salary and wages associated with the research activity, but also supporting activity costs such as contractor fees, facility rent, insurance, rates or other overheads to the extent they are applied to the activity.

How do I get started?

Criteria are specific, and opportunities need to be identified and actioned in time for the annual claim. Your advisor should be able to assist at three key stages of the claims process:

  1. Initial assessment and advice incorporating an assessment of each of the elements of eligibility - and the potential for a claim.
  2. R&D systems setup and processes tailored to the size and nature of your business to capture the data required for a claim.
  3. Claim optimisation for documentation, calculation and attribution of R&D expenses, which will help you streamline the claim process and optimise the claim value.

Conducting focused activities to develop new and more sustainable products and services is rapidly becoming an imperative for businesses to not only protect and regenerate our environment, but to protect their brand in a world where consumers are becoming increasingly discerning about the sustainable products and services they invest in. A tool to help fund these activities is already here, and there really is no time like the present to obtain all the help you can to to innovate.

Download your copy of The Circular Revolution here.