460. A tax policy to incentivise growth and decarbonisation is needed. The Government should use a balanced approach of tax incentives and disincentives to encourage economic activity that meets the dual objective of growth and decarbonisation.
461. In the UK, some tax measures are already in place to support the decarbonisation journey to net zero by influencing business and consumer decisions. These currently target the power sector via Carbon Price Support, broader business energy efficiency via the Climate Change Levy and Climate Change Agreement Joint Incentives and the waste sector via the Plastic Packaging Tax, Landfill Tax and Aggregates Levy. A net zero tax audit would help to ensure that the taxes not defined as 'environmental' also support the transition.
462. We know that other countries have been utilising tax incentives to drive growth and decarbonisation. Most recently the USA has developed a moon-shot tax credit policy offer for businesses in the 2022 Inflation Reduction Act,329 while the Canadian Government has offered a similar policy but in the form of a tax credit (tax rebate in USA) to lower the cost of capital in clean technologies and hydrogen production.330 This aims to encourage businesses to more actively participate in, and seek to directly financially benefit from, the transition to net zero and provide greater energy security.
CASE STUDY: The USA Inflation Reduction Act Offer for Businesses Cutting energy costs for businesses. • Small businesses can receive a tax credit that covers 30% of the cost of switching over to low-cost solar power. • There is a tax credit for up to $5 per square foot to support energy efficiency improvements that deliver lower utility bills. • Small businesses that use large vehicles like trucks and vans will benefit from a tax credit to cover 30% of the purchase costs for clean commercial vehicles, like electric and fuel cell models. ...and expanding their economic opportunities • Creating a level playing field via an increase in the refundable R&D tax credit for small businesses from $250,000 to $500,000. This can be used to reduce payroll taxes and other business expenses via investment in innovation and commercialisation of those new solutions. • Targeted tax incentives for the manufacturing of materials for batteries, solar and wind energy but also for deep decarbonisation technologies such as carbon capture systems and electrolysers for hydrogen331. |
463. Evidence from OECD countries suggests that corporate taxes reduce investment in tangible assets and R&D and in theory, lowering the cost of capita via tax relief should make business investment more attractive.332 Furthermore, we know that increases in business investment tend to be driven by several firms undertaking a new investment, rather than increases in the size of existing projects, with investment risk at a firm level being an important factor.333
464. Businesses want to be part of the transition and government should empower them to do so. There are some businesses who consider tax relief to be a useful incentive for investment:
"Provide specific investment tax relief for businesses who can demonstrate a clear contribution to the UK net zero objectives (along the lines of the R&D tax credit)." - Abundance Investment334
"[The Government should] target easy to access, high leverage financial incentives: For example, tax relief for businesses using low carbon technologies in operations. Unlike R&D tax reliefs, the focus would be on the application of low carbon technologies that advance the net zero transition." - University of Derby Business School335
465. However, while tax credits are planned in other competitor countries as discussed above (and in Pillar 2), evidence on effectiveness of tax credits to influence investment decisions to grow and decarbonise is limited. Given current cost pressures on UK businesses, more research is needed to understand the likely impact on business investment today, for example in the uptake of energy efficiency technologies.
466. Furthermore, the UK Government should be mindful of the policy choices made by other countries, as they are made within a political context. Alternative interventions may be better suited for the UK given our own policy landscape.
467. As part of a wider review into the tax system to incentivise investment in decarbonisation, HMT should explore the effectiveness of tax reliefs for businesses in encouraging investment, when energy costs are so high.