Could your business benefit from a ‘greener’ tax system?

A ‘greener’ tax system | npower Business Solutions

We have previously discussed the many commercial benefits tied to ‘greening’ your business. As well as reducing cost and carbon emissions, demonstrating a serious approach to sustainability can help to boost brand reputation, as well as giving your business a crucial competitive edge when securing investment or new contracts and partnerships. And, with more of the world’s leading businesses making carbon reduction commitments right across their value chain, the link between commercial success and sustainability will only grow stronger in the years to come.

The need for tangible financial reward

However, for many businesses, short-term financial priorities are creating a barrier to investment in decarbonisation, meaning the long-term commercial benefits of sustainability often don’t provide enough incentive to invest. For these businesses, incentives need to be more immediate and tangible; positively impacting the bottom line.

In our report, Plot Your Path to Net Zero: A Focus on Incentives, we consulted with over 60 organisations across sectors including manufacturing, public sector and transport, to look at where they would most welcome incentives to support their decarbonisation plans. It showed that while bigger measures such as on-site generation and electric vehicles (EVs) were popular, the top answer was energy efficiency - which for us is an immediate ‘no regrets' action to take.

So, what is needed to incentivise businesses to invest in decarbonisation? It is a tricky question. However, with many key policies and strategies still in the pipeline - including the crucial Heat and Buildings Strategy, Net Zero Review and Net Zero Strategy - three quarters (75%) don’t believe current government policy offers them enough incentives to invest.

With this in mind, we asked businesses whether they agreed with the recommendations outlined by the Confederation of British Industry (CBI) in its ‘Greening the Tax System’ report. It calls for the government to review ‘how the UK tax system could be harnessed to accelerate the reduction of emissions’ by introducing environmental taxes and tax incentives which act as levers for change. 83% of businesses told us they would welcome an overhaul of the tax system laid out by the CBI.

Let’s take a quick look at their recommendations:

Incentives for zero emissions vehicles

The CBI believes that emissions from the transport sector can be tackled, in both the domestic and commercial setting, through new tax policies that encourage the uptake of zero emissions vehicles. This would include the extension of the 1% company car tax rate (BiK) and a longer term commitment to keeping the rate down (it rose from 0% to 1% in April 2021). The CBI also recommends using the new ‘super deduction’ tax incentive announced by the Chancellor in the Spring Budget to increase capital allowances on zero emissions vehicles to 120% of investment value, and incentivising purchase of net zero vehicles with changes to vehicle excise duty (VED) and VAT rates.

Incentives for low carbon buildings

The CBI believes that for residential, commercial and public buildings to become more energy efficient, and to encourage businesses to move to low carbon heating and renewable energy, the tax system should work as an enabler of change.

Under the current system, taxes may actually indirectly deter investment in energy efficiency improvements or new technologies. For example, business rates rise when property value increases or new plant and machinery assets are added. This includes green technologies like solar photovoltaic (PV), putting the current business rates rules at odds with the government's net zero ambitions.

Incentives for industrial emissions reduction

Decarbonising the industrial sector will be a crucial part of the net zero puzzle and has been identified by the Climate Change Committee (CCC)1 as a key sector for the government to support through funding and incentives. Here, the CBI notes that a supportive tax environment should align with the government’s new Industrial Decarbonisation Strategy. This would mean finding ways for tax incentives to support research and development (R&D), investment in innovative new technologies and adoption of alternative processes to replace carbon intensive ones.

One thing that’s certain is that the government will need to shape a tax system that ensures any investment can lead to lower production costs, rather than higher ones, so that businesses can remain competitive and do not need to pass on increased costs to consumers.

A way forward?

So, are the recommendations from the CBI the best way forward? Our respondents seem to believe so, and certainly a ‘carrot and stick’ approach would make sense. However, whatever incentives are hopefully to come in future government announcements, there needs to be a high level of awareness or the opportunities could be missed.

For example, it was interesting to hear that only 13% of our respondents had previously taken advantage of government incentive schemes such as the Non-Domestic Renewable Heat Incentive (NDRHI) or Feed-in Tariff (FIT). And, many smaller manufacturers could be unaware that they may be eligible for a Climate Change Agreement (CCA) to reduce the Climate Change Levy (CCL) they pay.

This suggests that either the schemes were unsuitable for many businesses, that they didn’t go far enough to make investment appealing, or that poor awareness and understanding of the schemes meant many businesses missed out on important savings. We believe that it is most likely a combination of all three of these things.

If you’re interested in finding out more about the incentives available to help you plot your path to net zero, our report contains expert advice, as well as insights into how incentives are changing and how other businesses are approaching decarbonisation. Download it here.


1 The Sixth Carbon Budget, CCC, December 2020

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