Features

We are similar to donkeys in many ways. There are two ways to get us to move – by application of force (sticks) or by positive incentives (carrots). Without these motivators it is very hard to get either donkeys or ourselves to move away from established patterns of activities, or a juicy looking bit of grass.

Nowhere is this more evident than in that area where tax policy meets environmental concerns. Governments around the world are focussing their minds on how to address climate change, reduce emissions and encourage the citizens and corporations of their countries to aid them in meeting international targets.

But why tax at all? To quote from the Chartered Institute of Taxation’s recently published and excellent Green Tax Report¹,

“The basic rationale for the use of taxes and charges in environmental policy is provided by the existence of environmental externalities: impacts on the environment (and perhaps thence on people), which are side-effects of processes of production and consumption, and which do not enter into the calculations of those responsible for the processes. Where the effects are negative, externalities are costs. By levying a tax or charge on the activity giving rise to the effect, the external cost can be partially or wholly internalised. There is increasing evidence that environmental externalities, in terms of their effects on human health, buildings and ecosystems, are now very substantial. Stern (2007, p.xviii) called anthropogenic climate change as a result of greenhouse gas emissions “the greatest market failure the world has ever seen”, and estimated that, without mitigation action, it could result in the loss of 5-20% of global GDP (ibid., p.xv). Taxes on emissions or activities leading to environmental externalities are intended to internalise such externalities.”

Through the use of tax carrots and sticks, the UK Government is hoping to enlist individual taxpayers and businesses to its side in fighting against activities damaging to the environment and the climate. This year’s Budget included some significant changes intended to addresses these issues.

UK taxes

There are six UK taxes that are designed specifically to be ‘environmental’. These are fuel duty (easily the most profitable of the lot), vehicle excise duty, air passenger duty, landfill tax, climate change levy and aggregates levy. In most cases these taxes act as sticks.

In addition, many other more familiar taxes have been ‘greenified’. By way of a few examples, corporation and income tax now provide incentives to invest in energy saving equipment and processes and tax credits for those clearing contaminated land. VAT has reduced rates for installing certain energy-saving materials and there is Stamp duty land tax relief for purchasers of new zero carbon homes (now including zero carbon flats) –not an easy relief to get since there aren’t many of these around!

Capital allowances

Capital allowances are one of the best carrots in the Government’s armoury to encourage capital investment. Capital expenditure, which would not normally be allowable as a deduction against income, is deducted when it falls within the capital allowances rules. Part of the regime allows a deduction for expenditure on qualifying plant and machinery used as part of a trade. Following changes over the last few years, the capital allowances regime has now been radically reformed.

Currently, most businesses of any size are able to claim as a deduction against income of 100% of the capital expenditure incurred on (most) plant and machinery up to £50,000 a year. Above that, the deduction for expenditure on most plant and machinery is 20% over the life of the asset on a “reducing balance basis”.

But the 2009 Budget included a measure increasing the allowances you can claim in the year of acquisition of the asset to 40% providing that this expenditure is incurred in the current tax year. This is a blatant move to encourage people to invest more, and it may well work. If you were going to buy something next year, the doubling of your first year allowances may well persuade you to spend sooner rather than later. This is good news for manufacturers of items not covered by the next type of allowance.

Enhanced Capital Allowances

‘Enhanced Capital Allowances for Energy Saving and Water Efficient (Environmentally Beneficial) Technologies’ is not the catchiest title for a budget note. The Enhanced Capital Allowances (ECA) regime encourages businesses to invest in technologies that are energy efficient, reduce water use or improve water quality. It even has its own websites: http://www.eca.gov.uk/ and http://www.eca-water.gov.uk/. The Government introduced the ECA scheme in 2001 to encourage businesses to invest in low-carbon, energy-saving equipment. As part of the Climate Change Levy Programme, it was designed to help the UK reach its Kyoto target of reducing carbon emissions by 20%.

The current regime is very favourable for businesses – 100% of the cost of capital expenditure of energy efficient technologies is available to deduct against profits. Normally capital allowances on these would be given at 20% per annum on a reducing balance basis.

There are two lists that businesses need to be aware of: the Energy Technology Criteria List and the Water Technology List. These are reviewed annual to ensure that they are up to date and relevant, with changes made annually in the Budget. It is advisable to check those lists before undertaking expenditure on technologies that could benefit from these allowances.

Currently, the Energy Technology Criteria List includes:

• Air-to-air energy recovery;
• Automatic monitoring and targeting;
• Boiler equipment;
• Combined heat and power;
• Compact heat exchangers;
• Compressed air equipment;
• Heat pumps for space heating;
• Heating ventilation and air conditioning zone controls;
• Lighting;
• Motors and drives;
• Pipework insulation;
• Refrigeration equipment;
• Solar thermal system;
• Warm air and radiant heaters.

This list will be updated to include uninterruptible power supplies, and two sub-technologies: air to water heat pumps and close control air-conditioning systems. Meanwhile, three sub-technologies will be removed: air-source: single duct and packaged double duct heat pumps, group source: brine to air heat pumps and water source: packaged heat pumps).

The Water Technology Criteria List includes:

• Cleaning in Place Equipment;
• Efficient Showers;
• Efficient Taps;
• Efficient Toilets;
• Efficient Washing Machines;
• Flow Controllers;
• Leakage Detection Equipment;
• Meters and Monitoring Equipment;
• Rainwater Harvesting Equipment;
• Small Scale Slurry and Sludge Dewatering Equipment;
• Vehicle Wash Water Reclaim Units;
• Water efficient industrial cleaning equipment;
• Water management equipment for mechanical seals.

This list has been left alone for the time being.

Other budget news

There was certainly plenty to talk about in the budget, most of which has been forgotten amidst discussion about MPs’ expenses and the 50p rate of tax for high earners. However on the green front, there were plenty of other points of note, in particular the (well intentioned at the very least) new car scrapping scheme partially designed to encourage the reduction of emissions by swapping old vehicles for new cars. Possibly at the fringes of mainstream interest were amendments to climate change levy and landfill tax which will have a less visible (but equally important) impact on the way that businesses behave.

References
1. www.greentaxreport.co.uk/.

Shimon Shaw is a Solicitor at Matthew Arnold & Baldwin LLP
www.mablaw.co.uk