How to reduce tax on a £1 billion investment in green aviation fuel

Alfanar Group has confirmed its £1 billion investment in its Lighthouse Green Fuels (LGF) project, which is to be based in the North East of England. The announcement came during UK Prime Minister Boris Johnson's recent visit to Saudi Arabia. Given the scale of the investment and the volume of SAF produced, if Alfanar is able to benefit from the UK's patent box regime by having a UK patent in place, they could reduce their tax burden massively.

As some background to the project, Alfanar Group was announced as one of the winners of the UK Government's Green Fuels, Green Skies (GFGS) Competition on 3 December 2021 alongside Advanced Biofuel Solutions Ltd, Fulcrum BioEnergy Ltd, Green Fuels Research Limited, Lanzatech UK Ltd, Carbon Engineering, Nova Pangaea Technologies (UK) Ltd, and Velocys Projects Ltd. 

The LGF project will use gasification and Fischer-Tropsch chemistry to generate sustainable aviation fuel and naphtha from household and commercial waste. Typically, Fischer-Tropsch reactions use synthesis gas created from natural gas by partial oxidation to generate a mixture of hydrogen and carbon monoxide, which is subsequently converted to liquid hydrocarbons. As such, the traditional process still relies on fossil fuels. The possibility of using household waste is exciting as that waste may have gone to landfill, where it could release methane gas, or simply incinerated without any utility. 

Using household and commercial waste adds a further level of complexity due to the variability of feedstock as well as the possibility of contaminants which could poison the catalysts used in the reaction, but with an investment of £1 billion, it is clear that Alfanar has managed to overcome these issues and may have protected some of the innovations which have allowed them to achieve this. With the LGF project set to generate 180 million litres of fuel per year, if this was done via a patented process, Alfanar could benefit from very significant tax breaks by way of the UK's Patent Box regime, which would likely dwarf the cost of obtaining patent protection in the UK.

Indeed, any company looking to operate in the SAF or green fuels industry in the UK, including all the winners of the GFGS competition, should seriously consider obtaining patent protection, even if it is for purely tax purposes. According to figures released by the UK government, in 2018/19 tax year, 1405 companies claimed Patent Box Relief, with a total value of £1,129 million, which averages to just over £800k per company per year. As patents last 20 years, the tax savings can run into the millions or tens of millions over time.

It is also great to see further investment in the NE of England, which is the largest industrial centre in the UK, and to see the generation of hundreds of skilled jobs in the green energy sector.

The UK, and the rest of the world, is going to need more projects like this in the coming years in order to generate the volume of sustainable aviation fuel required to fuel the future. The UK government predicts that the SAF sector could generate between £700 million and £1.66 billion per year for the UK economy by 2040, with "potentially half of this coming from the export of intellectual property and the provision of engineering services", and could create between 5000 and 11,000 green jobs.

These numbers seem to be quite conservative given the worldwide potential of green fuels and the government will need to make further efforts to support this growing industry. The creation and exploitation of intellectual property, such as by licensing, has the potential to have a significant environmental benefit for the world and significant financial benefit for its owner. Licensing may be particularly attractive as no cap-ex is required by the licensor and they can reap the benefits of their investment in research and development.