Responding to the Net Zero recommendations: tax

In January 2023, Chris Skidmore MP published a report, Mission Zero: Independent Review of Net Zero. This report was commissioned by the government to consider how the net zero target might maximise economic growth whilst also increasing energy security and affordability for consumers and businesses. The Report contained a number of recommendations in relation to tax policy as well as highlighting a number of other areas where stakeholders made suggestions as to how tax changes might incentivise the move to net zero. For more details, see our article Net zero and UK tax policy.

The government has now responded to that report with its publication, Responding to the Independent Review of Net Zero's Recommendations. The response takes the format of responses to each of the 129 recommendations included in the original independent report. The response agrees with the review's conclusion that net zero is the growth opportunity of the 21st century and could offer major economic opportunities to the UK - but that decisive action is needed to seize these. Other countries such as the USA with the Inflation Reduction Act are moving quickly, and the UK must do the same.

The following recommendations and responses incorporate aspects of the UK tax system.

Recommendation 58: By Autumn 2023 HMT should review how policy incentivises investment in decarbonisation, including via the tax system and capital allowances

The response emphasises that the government recognises the importance of incentivising investment in decarbonisation, to support businesses with their transition to net zero and to meet the UK's legally binding carbon budgets.

It points out that the March 2023 Budget announced significant changes to the capital allowances regime in the UK from April 2023, including permanently increasing the Annual Investment Allowance to £1m and introducing a policy of full expensing, allowing companies to write off the full cost of qualifying main rate plant and machinery in the year of investment, with a 50% first year allowance for special rate plant and machinery investments. It points out that businesses investing to help improve their energy efficiency will benefit from these changes (though they are not limited to energy efficiency expenditure, of course) and the government expects the capital allowances changes announced at Spring Budget to improve the adoption of newer, more energy efficient technology and help support green industries.

More generally, the response notes that the government keeps the tax system under continuous review and will engage with industry and carefully consider how best to incentivise businesses to invest in green technology. This will help the government to consider whether there is a case for doing more through the tax system or whether other levers are more appropriate.

Recommendation 106: Government to equalise VAT on public and private electric vehicle charging in 2024

In effect, the response evades this question, merely pointing out that decisions on tax including VAT are for the Chancellor to make as part of the tax policy making cycle and Budget process and that the government has committed £2.5bn to support the transition to zero emission vehicles since 2020.

However, in a written answer to questions on 23 February 2023, Victoria Atkins, Financial Secretary to the Treasury, noted that there was no specific lower rate of VAT for domestic charging of vehicles, simply that the practical challenges of differentiating between the electricity used at home for general domestic purposes, and electricity used to charge EVs currently mean that the domestic fuel and power reduced rate is effectively being applied to EV charging at home. However, since introducing an additional VAT relief for public EV charging to match the VAT treatment of domestic fuel and power would impose additional pressure on the public finances, to which VAT makes a significant contribution, she stated that there were therefore no plans to change the VAT treatment of EV charging.

Recommendation 114: Government should consider options to support homes to include roof solar panels installation as part of its retrofit provision to support homes reaching the Net Zero Homes Standard

In response to this recommendation, the government notes that it announced a zero rate VAT on the supply and installation of (some) energy saving materials to domestic homes for 5 years from March 2022.  

Recommendation 121: By Autumn 2023, government should review how to incentivise greater R&D for net zero, including considering the role of clarity on research priorities and government support, tax credits, greater ring-fencing of R&D spend, and enabling regulations.

In its response, the government agrees that it is important to continue to incentivise greater R&D for net zero. To this end, it notes that several actions have already been taken to address the individual aspects of this recommendation, and that, from a tax perspective, the government is currently consulting on the design of a potential merged R&D tax relief scheme, including whether this should include differentiated rates of support for certain types of R&D or R&D intensive companies.

Comment

The recommendations and responses remain rather piecemeal at this stage and lack the scale and ambition of measures such as those included in the US Inflation Reduction Act. Indeed, some of the more significant measures, such as the improvements in the capital allowances regime, are not targeted at energy efficiency measures at all and other areas (such as targeted R&D) are yet to be put forward. It remains to be seen, therefore, to what extent the government (and future governments) will use tax incentives as targeted measures to incentivise the move to net zero.