Going green – has the government used tax to drive the right behaviours, or is this a ‘COP’ out?
As environmental policies dominate the news, it started me wondering what tax savings were currently out there for ‘going green’. Tax is much more than just a way of raising money for public finances, it is an incredibly complex tool used to drive behaviours desired by the government. If we are truly serious about climate change as a country, then taxation of business should be evolved to encourage efforts to reduce carbon footprint and punish those who do not change their behaviours. Below I look through a few carbon saving ideas and decide if they are rewarded with tax savings.
Electrification of Vehicle Fleets
There are significant tax breaks available for both companies and employees relating to electric company cars, with extremely low benefit-in-kind rates and favourable corporation tax savings. If this wasn’t enough of a ‘carrot’, there is also a significant ‘stick’ being the increase on benefit-in-kind rates for almost all other vehicles, such that it is almost never a good idea to own a standard fuel car through a company. Electric cars also carry no road fund license cost and electricity is not treated as fuel for benefit-in-kind purposes. The government possibly could go further, perhaps allowing VAT to be reclaimed on the purchase of electric vehicles to really supercharge the uptake.
Worryingly, company van owners were not receiving much of a tax break on fully electric vans, which seemed at odds with the government’s plans. This however has now been reversed and thankfully there will be no benefit-in-kind at all for electric vans from the tax year we are currently in. Vans, unlike cars, also qualify as plant and machinery for capital allowances purposes, so businesses currently get a 130% super-deduction for tax on purchasing a new van.
Energy Efficiency of Buildings
It may be surprising to know that there is not a significant amount of tax relief available for businesses. Capital allowances can be claimed on insulating existing buildings, but insulation of new-builds is expected as standard and so no tax relief is given. Solar panels are considered ‘special rate’ assets for capital allowances, so whilst they do qualify for capital allowances and generally (depending on total expenditure) receive 100% allowances in year, they do not qualify for the 130% super-deduction currently available on P&M and so they are less attractive as a result. I suspect a lot more could be done to encourage businesses to improve the energy efficiency of their estate.
Energy Efficiency of Processes
Although there is no direct tax break for improving process energy efficiency, if a scientific or technological advance is required to improve a process which saves energy, improves yield, or reduces waste, then the project will be qualifying for Research & Development (R&D) tax savings which are extremely generous. However, simple changes which do not involve an advance will not result in any tax savings.
A current popular option for businesses is to offset carbon – essentially investing in schemes which reduce Carbon Dioxide in the atmosphere, for example renewable energy projects or tree planting. HMRC have not specifically allowed costs incurred for carbon offsetting, and general rules say that anything that has a ‘dual purpose’ and is not completely for the purpose of the trade would not receive a tax deduction. It seems crazy that the government would not like to encourage this, so perhaps there will be some specific legislation on this soon, particularly as its popularity grows. It would hopefully be possible to argue that offsetting emissions is for the benefit of the trade as it would allow the business to promote itself to its customers and employees.
Tax breaks are offered to investors who invest in small entrepreneurial companies. Generally speaking, most types of trading companies are acceptable with the exception of certain things – interestingly, electricity generation is specifically excluded, meaning investors cannot get tax breaks for investing in businesses generating electricity in renewable or low carbon ways.