More to be done with tax policy to help achieve net zero

On 13 January 2023, Chris Skidmore MP published the final report Mission Zero: Independent Review of Net Zero. Four of the report’s 129 recommendations relate specifically to tax policy.

One overarching tax policy recommendation is: “By Autumn 2023, HMT should review how policy incentivises investment in decarbonisation, including via the tax system and capital allowances.” The report explores at a high level what HM Treasury might consider in order to achieve this.  

Elsewhere, the report recommends: “By Autumn 2023, Government should review how to incentivise greater R&D for net zero, including considering the role of clarity on research priorities and government support, tax credits, greater ring-fencing of R&D spend, and enabling regulations.”

Some current government activity is already seeking to address these issues. For example, the consultation on the design of a potential single research and development (R&D) scheme invites feedback on the possibility of more targeted support for ‘green technology’. However, contributors to the Mission Zero report also indicated that more could be done to help businesses be part of the transition to net zero. Reliefs should go beyond R&D and actually incentivise the application of low carbon technologies that advance the net zero transition.

Similarly, the report suggests that HMT considers a successor to the super-deduction tax relief with a focus on increasing investment in low-carbon technologies. The Tax Faculty supports any move to incentivise investment in ‘green technology’, but is mindful that capital allowances won’t always increase investment.

The review echoes this, reporting that while tax reliefs to help achieve net zero are an option, it heard that many businesses are currently suffering cash flow issues. Loans, grants and direct funding might be better mechanisms to increase investment for those businesses. Due to falling profits from the energy crisis, many businesses may choose to retain cash rather than invest. 

The Tax Faculty has received mixed feedback from members on the extent to which tax reliefs such as capital allowances encourage investment. However, there is a general consensus that such reliefs do not always influence investment decisions. The faculty notes that the outcome of HM Treasury’s 2022 review of the UK’s capital allowances regime is still awaited.

The report also cited business rates as a policy that could influence investment, in particular, the proposal to increase the small business rates relief threshold. The report urges the government to consider how business rates as a policy could be used to support business growth and decarbonisation.

Changes to indirect tax to help achieve net zero were also considered in the report. There were calls for: 

• VAT to be cut on repairs for individuals to make repairing products cheaper than replacing them; and
• making permanent the current zero rate for the supply of energy-saving materials, which is currently due to expire in 2027. 

However, only one VAT policy change made the official list of recommendations: the equalisation of VAT on public and private electric vehicle charging from 2024. “Savings from the lower running costs of electric vehicles are drastically reduced when a household does not have access to home charging,” the report states. VAT is charged on domestic electricity bills at the reduced rate (5%), but is currently charged on public electric vehicle charging at the standard rate (20%). The review calls for these rates to be balanced, although it falls short of recommending a rate.

The report also recommends that the government progresses its consultation on carbon leakage measures, including a carbon border adjustment mechanism (CBAM). A CBAM applies a carbon price at the border to imports of certain products, based on their embedded emissions or carbon footprint, equivalent to the carbon price borne on those products by domestic producers.

On delivering green jobs, the report recommends increasing the flexibility of the apprenticeship levy, and assessing whether the levy aligns with government net zero and growth priorities. The faculty notes that making it easier for employers to use the apprenticeship levy to train people in technical skills would be welcomed by employers, who presently consider it yet another tax. 

The report acknowledges that many respondents flagged the future required reforms to fuel duty and road taxation for changes in the vehicle and fuel mix, and that such reforms should consider how to reward lower carbon options. ICAEW is disappointed that the report did not call on the government to set out a roadmap for reform, particularly given that this also has repercussions for the long-term sustainability of the public finances.

The Tax Faculty will continue to work with government to develop policies that promote sustainability and net zero. 

ICAEW’s Chief Executive Michael Izza has also provided some wider insight into this review and its 129 recommendations.

 

 

ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.