Guide to environmental tax breaks

Shaun Davison, manager for Lovewell Blake

Climate change has risen to the top of national agendas globally over the past decade, with governments under collective pressure to reduce carbon emissions and improve environmental sustainability.

Shaun Davison, manager for Lovewell Blake

Governments are increasingly using environmental taxes to encourage businesses to operate in a more environmentally friendly way and discourage business practices that damage the environment. The UK is no exception, and there are environmental taxes and schemes for different types and sizes of businesses, in order to achieve environmental targets. 

Where available, businesses should maximise the use of green tax breaks to reduce the costs of operations which may in turn help achieve their Environmental and Social Responsibility (ESR) goals. 

The most common types of green taxes and tax reliefs businesses can take advantage of are: 

Climate Change Levy and the use of Climate Change Agreements

The Government introduced the Climate Change Levy (CCL) in 2001 as part of a wider array of instruments to reduce greenhouse gas emissions. It was designed to encourage businesses to reduce their energy consumption, opposed to reducing carbon emissions, and/or promote the use of energy from renewable sources. 

The CCL is levied on supplies of electricity, gas and solid fuels (e.g. coal, lignite, coke and petroleum coke) and applies to businesses in the industrial, commercial, agricultural or public service sectors.

Energy intensive sectors can enter into voluntary Climate Change Agreements (CCA) with the Department for Business, Energy and Industrial Strategy (BEIS), entitling them to a reduced rate of CCL provided they meet agreed efficiency targets, which have been agreed on a sector by sector basis. 

CCAs are available for a wide range of industry sectors from major energy-intensive processes, such as chemicals and paper production, to supermarkets and agricultural businesses, such as intensive pig and poultry farming.

The current CCA scheme commenced in April 2013 and will run until 31 March 2025.

Emissions trading

The EU Emissions Trading System (EU ETS) affects businesses from energy-intensive sectors, such as the energy industry and certain manufacturers.

This allows companies to buy and sell greenhouse gas emission allowances in the marketplace in order to reduce their environmental impact. If a business is covered by EU ETS they must meet ambitious emissions targets by either reducing their emissions output or by trading the emissions allowances.

Capital Allowances on energy-efficient items

You can claim capital allowances when you buy energy efficient, or low or zero-carbon technology for your business reducing the amount of tax you pay, through claiming Enhanced Capital Allowances (ECA).

Undoubtedly one of the most utilised green tax breaks used by small and medium enterprises, ECAs, a type of first year allowance, provide for 100% tax relief on the purchase of qualifying equipment. This is predominantly useful for businesses incurring high capital expenditure, such as start-ups or businesses looking to make renovations to their premises. 

ECAs can benefit businesses who have fully utilised their Annual Investment Allowance (AIA) or acquire assets not covered by this relief (e.g. cars).

Examples of ECA currently available include:

  • electric cars and cars with zero CO2 emissions
  •  zero-emission goods vehicles
  • equipment for electric vehicle charging points
  • plant and machinery for gas refuelling stations, for example storage tanks and pump
  • gas, biogas and hydrogen refuelling equipment
  • companies incurring expenditure on plant and machinery for use in a freeports zones, including green freeports

For companies qualifying for the new super-deduction, first year allowances may be available on the purchase of brand new plant and machinery expenditure bought between 1 April 2021 and 31 March 2023, at the rate of 130% or 50% - depending on the category of expenditure. 

In particular, companies looking to upgrade their business premises to a modern standard, such as installing electric, heating and/or water systems, fitting solar panels or thermal insulation, would qualify for 50% tax relief (where the AIA is not available), which would otherwise be subject to a writing down rate of 6% per year.

Electric vehicles

The purchase of electric vehicles may provide tax efficient benefits for companies, including the use of tax advantaged capital allowances discussed above.

Although electric cars no longer qualify for Plug-In Car Grant (PICG), the Government has extended support to other grants for low-emission vehicles, such as electric vans, trucks, taxis and motorcycles, reducing the initial capital purchase of these vehicles.

For businesses that have large fleets, operating costs of running vehicles can be reduced by opting for greener alternatives. For instance, petrol and diesel cars are subject to higher Vehicle Excise Duty (VED) charges than that of their electric counterparts and the associated fuel costs are usually substantially higher, even before factoring in increasing energy prices.

Green reliefs for business rates

In the Spring Budget 2021, the Government announced the introduction of two new measures to support green investment and the decarbonisation of buildings.

The first measure provides an exemption from business rates for eligible plant and machinery used in onsite renewable energy generation and storage, such as solar panels and heat pumps, wind turbines, and battery storage, as well as storage used with electric vehicle storage points. 

The exemption provides businesses with some incentive to continue to invest in green energy technologies at a time when pressures surrounding the cost of living are starting to take priority over the need to reduce carbon emissions.

The exemptions apply from 1 April 2022 and will last until 31 March 2035, for business premises situated in England.

The second measure allows 100% rate relief for eligible low-carbon heat networks that have their own rates bill.

Land remediation relief

Land remediation relief allows a company to claim relief for qualifying expenditure incurred on remedying contaminated land, and to claim an enhanced deduction of 150% for that expenditure. This relief is valuable for companies looking to build commercial properties on brownfield sites. 

Plastic packaging tax 

Introduced from April 2022, Plastic Packaging Tax (PPT) is a tax on finished plastic packaging components that contain less than 30% recycled plastic and is chargeable if you import or manufacture finished plastic packaging components that exceed the statutory limits. 

You can get tax relief if you export finished plastic packaging components.

Please read our in-depth guidance for further information.

Research and development of green technologies

For companies that are working towards developing green technologies or scientific advances, Research & Development (R&D) tax relief may be available, which can help fund the development of R&D projects.

R&D tax relief is available to companies who are engaged in projects which seek to achieve an advance of some sort in overall knowledge or capability in a certain field of science or technology. This is not limited to blue sky research and can apply where a company undertakes development of a new product or process.

In the context of green advancements, this could include development of emerging green technologies or existing products to make them more sustainable. 

For example, a company looking to reduce the amount of plastic consumption may aim to develop alternative packaging to reduce plastic whilst retaining functionality of the product. On the basis the project creates an advance in the overall field, not just for your business, it may be qualifying R&D.

As well as green tax breaks, the Government also provides green incentives to businesses, to encourage projects and investments that reduce environmental damage. These include grant funding, which are awarded to businesses investing in green technologies to increase energy efficiency or reduce carbon emissions.

With the race to net zero, businesses are being encouraged to become more environmentally friendly, whether this is through government green incentives and taxes or by customers looking to improve their carbon footprint. 

Aside from helping you to navigate the world of green tax breaks, Lovewell Blake can also provide a wide range of business accounting services.

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