Mission Zero: Can taxes help us achieve Net Zero?

Mission Zero: Can taxes help us achieve Net Zero?

Last month, a report into the UK's progress towards net zero recommended that the Treasury should review how the tax system could be used to incentivise decarbonisation. Helen Thornley, ATT technical officer, comments.

The UK is legally committed to achieving net zero by 2050 – net zero being the position where our emissions of harmful greenhouse gases have been reduced as far as possible, and those that cannot be eliminated are offset by actions that remove them.

In January, the government-commissioned review ‘Mission Zero’, chaired by MP Chris Skidmore, set out to see how the UK could better meet this goal and set out a number of objectives to ensure that the UK keeps on target in the coming years.

The review is wide ranging, but has a focus on financial and economic measures, and has pleasingly also highlighted the importance of the tax system. Within its ‘25 key actions by 2025’, the review recommends that, ‘by the end of 2023, HM Treasury should review how policy incentivises investment in decarbonisation, including via the tax system and capital allowances’.

While generally the comments are quite high level, it is worth knowing whereabouts in the tax system the review has suggested that the Government should look to make changes.

Capital allowances

The review notes that the super-deduction, which gives enhanced capital allowances to companies purchasing qualifying plant, is due to end on 31 March 2023. Its main recommendation here is that, as part of giving longer-term support to investment decisions, the Treasury should consider a successor to this measure, but this time focusing on encouraging low-carbon technologies.

It is disappointing that the review omits to note that the super-deduction is only available to companies. In the face of a climate crisis, there is an argument that all businesses need access to any such incentives.

Business rates

The review highlighted how businesses can be disincentivised from carrying out property improvements because such investment can increase the rateable value of the property, leading to higher business rates in future years.

Some of these issues have been addressed since the introduction in April 2022 of specific exemptions for certain green plant and machinery such as wind turbines, solar panels and battery storage. These items should no longer increase the rateable value of business premises. However, the review recommends that the Government should check that there are no further disincentives lurking in the business rates system which could discourage businesses from investing in green property improvements.

R&D tax credits

Here the review called for the Government to consider how to incentivise more R&D to help achieve net zero. As a possible option, the review suggested ‘greater ring-fencing of R&D spend’. The review didn’t go into further detail here, but from a tax perspective, potential ring-fencing could involve limiting R&D tax credits to projects which support net zero goals, or enhancing the tax credits available to those projects. Identifying and enforcing such restrictions will make more work for clients and advisers.

VAT

While many of the comments in other areas were quite high level, for VAT the review was more detailed and identified specific changes for the Government to consider.

Firstly, the review called on the Government to address the different VAT rates for public and private charging of electric cars.

Currently, electric car owners pay 5% VAT on electricity costs when charging at home, but 20% when charging elsewhere. The review has called for this imbalance to be equalised in 2024, highlighting how the current treatment increases the cost for those who don’t have access to home charging. This is often more of an issue for lower income households, who are less likely to have access to a garage or off-road parking.

The review also said that repairing products should be made more affordable, and flagged the role that VAT can have in increasing repair costs. While this seems an easy potential solution, it should be noted that reductions in VAT are not commonly passed on to the end consumer.

Finally, the review recommended that the zero rates of VAT on energy efficiency measures such as heat pumps and solar panels should be maintained permanently.

Read more: COP27 – Private sector net-zero transition guidance launched

Tax credits

The review highlights how ‘tax credits’ (meaning specific reliefs or rebates) are another lever which the Government can use to encourage change. Countries such as the US and Canada are already providing specific tax reliefs to encourage businesses to use lower carbon energy sources like hydrogen.

However, the review goes on to note that ‘evidence on effectiveness of tax credits to influence investment decisions to grow and decarbonise is limited’ – and acknowledges that the Government is not currently in a position to make large tax giveaways. So the review avoids recommending any specific measures, but recommends instead that the Government should ‘should explore the effectiveness of tax reliefs for businesses in encouraging investment, when energy costs are so high’.

Summary

As most of the recommendations are quite high level at this stage, there is clearly a big role for HM Treasury to explore and develop potential policy ideas. In fact, the review notes that ‘the role of HM Treasury is crucial for determining the tax and spend levers used to deliver on these objectives’. If the timescales in the review are met, then we should start seeing more detailed ideas later this year, which will hopefully allow businesses to make longer term plans for a greener future.

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