Making predictions about tax changes over a 10 year period is challenging – tax policy will change substantially with each new government. However, climate change and the environment more generally is an issue on which there appears to be a degree of political consensus in the UK.
Despite that, the UK tax system does not yet contain a strong or coherent environmental policy. For example, rates of fuel duty have been frozen for a long period, at great cost to the Treasury. The Government's energy white paper "Powering our Net Zero Future" published in December 2020 makes no reference to future tax changes as a tool for meeting the UK's net zero target. The highest-emitting sectors of the UK economy will remain subject to a "cap and trade" emissions trading scheme (the UK ETS), closely modelled on the EU ETS that applied pre-Brexit. But for most companies, tax and climate change remain unconnected issues for now.
It seems inevitable that this will need to change if the UK is to achieve its net zero target: tax should be the game-changing eleventh point in the Government's "Ten point plan for a green industrial revolution" of November 2020.
There are already signs that tax will be used to incentivise individuals and businesses over the next 10 years to help meet the UK's net zero target, and broader environmental objectives. An early example is the UK's new plastic packaging tax, for which draft legislation was published in the latest Finance Bill.
Enhanced tax relief for investment in environmentally friendly equipment is another obvious area for possible change. The potential attractiveness of such a move has been heightened by the Government's 6 percentage point increase in corporation tax rates announced in the 2021 Budget with effect from April 2023: as tax becomes more burdensome, relief from it becomes more valuable.
The "super-deduction" announced in the 2021 Budget shows the Government's willingness to use tax relief for investment as a tool to boost the economy as it recovers from the pandemic, as was done in the aftermath of the second world war. There are two key features of the super-deduction, however, that are missing from an environmental perspective.
First, whilst it can apply to environmentally friendly equipment, the super-deduction as a whole is temporary (lasting only 2 years). This represents a gap in the system. Until recently tax relief could be claimed at a faster rate for specific categories of green expenditure (e.g. environmentally beneficial equipment and energy-saving plant and machinery). The scrapping of those categories of enhanced tax relief was presumed to be in anticipation of an overhaul of environmental tax reliefs, indicating that new categories could soon be introduced. But for now the super-deduction applies to any qualifying plant and machinery and so is not a direct part of such an overhaul.
Second, the super-deduction is not available to landlords, despite their pivotal role in investment. This appears to be deliberate and we understand that HM Treasury have confirmed that the super-deduction is not intended to apply to expenditure on assets used for leasing. This wasn't the case with the previous enhanced tax reliefs for green expenditure (which were abolished from April 2020). In the case of those reliefs, there was as an exception to the general rule that enhanced first-year allowances can’t be claimed on leased assets, so as to allow relief for expenditure on environmentally beneficial plant and machinery attached to a building which was let, recognising the green investment this would generate.
If the Government were to re-introduce enhanced tax relief for environmentally friendly equipment, and make it available to landlords again, it would create a powerful tool to influence behaviour and help achieve its net zero commitment.
Authored by Elliot Weston and Christopher Hyde
