Green carrots - how the tax system encourages the environmentally friendly

Much publicity has been given to the sticks with which the Government discourages business behaviour impacting negatively on the environment - climate change levy, landfill tax, aggregates levy and air passenger duty spring readily to mind. So, in the interests of the balance on which this site prides itself, this article deals with the carrots used, or to be used, by the Government to encourage taxpayer behaviour beneficial to the environment.

I will deal with eight such 'carrots', as follows:

1. Thermal insulation of industrial buildings

This relief has been in place for a considerable period, and takes the form of the identification of expenditure on thermal insulation of industrial buildings as plant for capital allowances purposes. This now becomes of particular importance, as industrial buildings allowances ("IBAs") are being phased out, whilst capital allowances on plant will remain, albeit in a revised form. Thus a business which has in the past claimed IBAs on such expenditure might now find it beneficial to reconsider that approach, and seek to establish a claim to plant & machinery capital allowances instead. It may or may not be possible for this to be retrospective, depending upon the specific circumstances.

2. Enhanced capital allowances ("ECAs")

An enhanced capital allowance is a 100% up-front tax deduction for investment in designated energy saving and environmentally beneficial plant and machinery. Full details of eligible items can be found on a dedicated website, such items falling into three categories:

i. Energy-saving plant and machinery

Items eligible for relief are listed on either the Energy Technology Criteria List or The Energy Technology Product List, managed by the Carbon Trust on behalf of DEFRA. The lists cover such items as:

Air to air recovery technology

Combined Heat and Power

Radiant and warm air heating

Solar thermal systems

ii. Low CO2 emission cars

You will need to hurry to take advantage of this one, as the relief expires on 31 March 2008. It applies to cars producing CO2 emissions below 120g of carbon per kilometre, such as the Toyota Prius. I have dealt below with the replacement regime effective from 1 April 2008.

iii. Environmentally beneficial plant & machinery (water technology)

Items eligible for relief are listed on the Water Technology Criteria List or the Water Technology Product List. The list covers items such as:

Efficient taps, toilets and showers

Leakage detection equipment

Efficient industrial washing machines and cleaning equipment

Vehicle wash waste reclaim units

With effect from 1 April 2008 it is intended that loss making companies (not partnerships or sole traders) will be able to surrender losses arising from expenditure qualifying for ECAs for a cash tax payment. Details of this relief are yet to be finalised.

3. Environmentally beneficial fixtures integral to buildings

A number of such items are currently regarded as part of the building for capital allowances purposes, and are thus ineligible for capital allowances. The Government is consulting, as part of its proposals to amend the capital allowances system, on including these as items eligible for the new 10% allowance on integral fixtures.

The proposed new treatment would apply to such items as 'Brise Soleils' and 'Active Facades', used to provide a measure of passive solar heating in modern buildings.

4. Car and fuel benefits

The Government approach in this area has elements both of carrot and stick. The level of car benefits has since April 2002 been measured by reference to CO2 emissions, and fuel benefits were brought into line in this respect in April 2003. From May 2007 a similar system applies to VAT fuel scale charges.

From April 2008 there will be a new 10% of list price charge for cars with CO2 emissions of 120 grammes per kilometre or below (currently the percentages range from 15% to 35%). There is also a discount of 2% on the applicable percentage for cars capable of being driven using liquefied petroleum gas (LPG), and that percentage is the lower of the figures relating to the car running on petrol and on LPG. This same discount will apply from April 2008 to cars manufactured to run on E85 fuel; this is a road fuel that is 15% petrol and 85% ethanol.

5. Contaminated land

Where a company (not a sole trade or individual) incurs costs on remediating contaminated land, it can claim a 150% corporation tax deduction for the cost.

The land (or buildings) must be in the UK, and must have been contaminated prior to acquisition (not by the purchaser!) Relief is available for employee, subcontractor and materials costs, and extends to asbestos removal.

6. The Landlord's Energy Saving Allowance ("LESA")

This is a 100% up front allowance for expenditure on energy-saving items in a UK property business. Prior to April 2007 it covered the following items:

Cavity wall insulation

Loft insulation

Hot water system insulation

Draught proofing

and has now been extended to include floor insulation. The other major change in 2007 has been to increase the available LESA from £1,500 per building to £1,500 per property, which is highly advantageous to landlords owning multiple flats or apartments in a single building.

LESA applies only to residential property, and does not apply to property under construction, furnished holiday lettings or property eligible for rent-a-room relief.

7. VAT on installation of energy-saving materials

The 5% reduced rate of VAT applies to the installation of such materials in residential property. Materials covered include:

Insulation material

Central heating controls

Solar panels

Wind and water turbines

Ground source heat pumps

Biomass boilers

8. Stamp duty land tax on carbon neutral homes

From 1 October 2007, for a 5 year period, the first sale of a carbon neutral home will be stamp duty exempt where the sale price is below £500,000. For sales at prices above that level, the SDLT charge will be reduced by £15,000.

To qualify for the relief it will be necessary to demonstrate zero carbon emissions for all energy use over the period of a year. This will require a high level of insulation and the provision of on-site renewable heat and power. There will be a certification process in this respect, with an appropriate certificate to be provided to the homebuyer by the housebuilder.

Summary

Whilst the above does not yet represent a comprehensive environmental tax code, the accelerating pace of change in this respect reflects the Government's genuine commitment to reduction of greenhouse gases. In this respect the reliefs currently available, and the taxes currently levied, may prove to be only the tip of the iceberg. In March 2007 the EU Commission published a Green Paper on the future of green taxation, which proposed that the overall basis of tax should shift from labour based taxes to environmental taxes, and thus we can expect there to be a lot more environmental carrots and sticks in the years to come.

Mark Simpson

Tax Planning Director