In early February 2023, the European Commission (EC) published A Green Deal Industrial Plan for the Net-Zero Age. Ahead of the Spring Budget, what tax policy ideas could the UK government take from the plan?
Most commentators agree that if we are to limit the rise in world temperatures and achieve net-zero by 2050, the next decade is critical.
Tax is a lever that influences behaviour. While the 27 countries that comprise the European Union (EU) might have 27 different sets of tax rules, the UK has just its own to consider. The forthcoming Spring Budget will give the government an opportunity to consider the UK’s own green strategy, what it looks like and how it might be supported by the tax system.
The aftermath of COVID and the war in Ukraine continue to consume financial resource, but these will pass. There is a need to plan for a longer-term future. The UK needs a strategy that business can rely on and plan within.
This is difficult for a democracy; there will be a general election before the end of 2024. But if our core objectives are shared and 27 other countries are able to agree a single plan, perhaps the UK could begin to agree some basic principles about how to plan for a green future.
The four pillars underlying the EC’s plan are:
- a predictable and simplified regulatory environment;
- faster access to sufficient funding;
- skills; and
- open trade for resilient supply chains.
Are there aspects of these pillars that the UK might also find useful?
Cutting red tape, simpler tax reliefs and faster dispute resolution
Tax simplification and certainty appear on almost everyone’s list of tax policy essentials. The EC is proposing a Net-Zero Industry Act to underpin industrial manufacturing of key technologies in the EU, covering items such as batteries, windmills, heat pumps, solar, electrolysers, carbon capture and storage technologies.
The intention is to cut red tape and fast track essential processes by having a “one-stop shop as a sole point of contact for investors and industrial stakeholders during the entire administrative process”.
In the UK, capital allowances and research and development expenditure are difficult tax incentives for businesses to navigate without professional help. It is not unknown for decisions on the amount of tax relief due to take many months or even years to agree.
Accurate budgeting for costs and revenues of a project requires certainty of the tax treatment at an early stage, but this can easily get side-tracked by protracted discussions with the authorities. A system to cut red tape and accelerate disputes in such cases would make projects easier to launch, while being more attractive to potential investors.
Perhaps greater certainty around the amount of tax relief might also improve access to finance, particularly for some of the more speculative renewable energy and sustainability projects.
Skills and (re-)training
The third pillar of the EU’s Green Deal Industrial Plan is focused on skills at all levels and for all people. The EU is particularly keen to address skills shortages in both green and digital. It aims to re-skill and upskill 6m people with an emphasis on inclusiveness for women and youth. How could the UK tax system support a similar programme, and where are our skills gaps?
In 2018, ICAEW responded to a consultation to an initiative which considered a tax deduction for self-funded training. It suggested that consideration be given to:
- extending the current tax deduction available for employers who train their employees (s250, Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003)) to unreimbursed costs of training incurred by employees themselves;
- including training costs as an optional remuneration arrangements exemption (s228A, ITEPA 2003) so that employees who sacrifice salary to fund training costs paid by employers are not taxed on the higher of the cost of the training and the amount sacrificed;
- simplifying the current position on self-employment and training; and
- introducing tax relief on training expenditure to develop new skills for the employed and self-employed.
Tax relief for re-training focusing on particular skills is difficult, but not impossible. Perhaps the government could reconsider how a tax deduction for self-funded training could work.
Further, the government could also look at whether lower student loan interest rates might apply to degree subjects in areas where the UK has skills shortages.
More imaginative solutions might also be used to help refugees arriving in the UK with much needed professional skills to transition to similar jobs in the UK, for which English language training might also be part of the package.
The EU is considering how it might fast track validating skills and recognising qualifications across not only its Member States, but also from third countries, looking at labour mobility policies and matching skills to employers’ needs. It is also exploring whether training expenditure by businesses might be treated as an investment rather than an expense or operating cost.
How do you eat an elephant?
You eat an elephant one bite at a time, so the old joke tells us. Perhaps this is also how to approach using tax to encourage behaviour change. The government can certainly consider the EU’s strategy, and those from others too, as a starting point.
The UK has a strategy of sorts around encouraging use of electric vehicles, but there doesn’t appear to be much cohesion to this. First, is it the right technology? Perhaps hydrogen will trump electric more quickly than anticipated. Assuming the UK pursues the electric solution for now, the government needs to decide on how to tax/give relief on all matters relating to using electric vehicles. Currently, the tax treatment is all over the place.
There also does not appear to be a strategy for developing a national grid of charging points. Rather, it appears to be left to individual householders, businesses and local councils to pay for or provide them at will. Surely the tax system could play a part in this, either through direct or indirect taxes? The VAT treatment for refuelling depends on where a car is recharged, rather than what it is being recharged for, which seems totally by happenstance rather than by design. This point was picked up by Chris Skidmore MP in his report Mission Zero: Independent Review of Net Zero.
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.