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Green tax incentives for capital expenditure

Twenty years ago, in 2001, Gordon Brown introduced enhanced capital allowances for energy-saving equipment. Businesses that spent money on items on an approved list could offset 100% of the cost against their tax bill, instead of being required to claim capital allowances at (usually) 18%.

In 2018, it was announced that these enhanced allowances would be abolished, and they came to an end in 2020.  Should the current Chancellor reinstate them – or do something which would encourage green investment even further?

The reason given for abolishing the enhanced allowances was that many businesses can claim 100% allowances on all or most of their capital spend in any case. The Annual Investment Allowance (AIA) is currently £1 million, and the recent Autumn Budget extended the period for the £1 million allowance to 31 March 2023, after which it is expected to fall back to its ‘normal’ level of £200,000. In addition, for the period from 1 April 2021 to 31 March 2023, companies can claim a ‘Super Deduction’ of 130% of the cost of qualifying plant and machinery – which is, of course, even better than claiming 100%.

Clearly, businesses will spend on energy-saving equipment if it saves them money overall, but at present there is no specific incentive in the tax system to encourage them to choose a green alternative, if there is one. And it is often the case that when new technology is introduced, it is more expensive than the older (and perhaps more polluting) tried and tested option. For this reason, there has been a series of incentives to encourage people to move towards electric cars, including not only direct subsidies but also exemption from the Congestion Charge and lower (or even nil) vehicle tax.

Is it time for a nudge? What has worked well in other areas is to identify a specific behavioural change that would be desirable, and then to focus on that change – so-called ‘Pigouvian’ taxes, with an objective of changing behaviour rather than necessarily raising Government funds. The two obvious examples are the increased tax on leaded fuel – which has been a major factor in its being completely phased out – and the plastic bags tax.

So, the Government should identify a specific change which would make a real difference to emissions and offer a specific incentive.  Perhaps the focus should be on measures such as efficient heating and power for businesses, in parallel to the new heat pump grant for domestic premises. This could be modelled on the Super Deduction, or on Land Remediation Relief (LRR) which gives a 150% deduction for expenditure on cleaning up contaminated land.

Any change should not be too complicated, or it will add to burdens on business and be less effective. The list of qualifying equipment should be relatively short and should make it easy to identify whether a particular project would qualify. Let’s introduce the ‘Super Heat Deduction’, with a rate of 130% or even 50% on investment which helps businesses reduce their emissions. I’d give that a warm welcome!

Contact us

If you would like to discuss any of the above please contact your usual Blick Rothenberg contact or Heather Self, using the details on this page.

You can also visit our COP26 Hub where we will share an article written by our experts each day the COP26 conference takes place with a focus on green taxation.