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Rishi Sunak needs to use the tax system to encourage greener behaviour

One of the most disappointing aspects of last week’s UK budget was that, in many respects, it did nothing from an environmental perspective. Indeed, one could argue that with the drop in airport duty for intra-UK flights, it was actually a step backwards. However, despite the bad news associated with last week’s budget, there are a number of options available to the Chancellor over the coming years, as he looks to create a UK employment tax system which encourages ‘green behaviour’ and helps support the UK economy (and UK consumers) become increasingly ‘low carbon’.

Firstly, some good news. Green cars – electric vehicles or those with hybrid technology – now represent over a third of all new car sales in the UK. However, fuel tax has been a major source of Revenue for the UK Government historically; for example, fuel duty in 2019/20 tax year was worth over £27 billion to the Government.

A fall in fuel duty – say to £10 billion per annum over the next 5-6 years – would create a major ‘hole’ in the Government’s finances and would need to be filled by either an increase in other, existing taxes or some new types of taxation.

Or put another way, one should note that a drop of £17 billion in fuel duty from £27 billion to say £10 billion would actually represent a third of what the Government receives each year in corporate taxes (ca. £50 billion per annum) or more than 5p on the basic rate of Income Tax each year.

As such, over the coming years, it would be good to see the Government increase the fuel duty rate for petrol and diesel significantly. While fuel prices are presently at an all-time high in the UK, these increases are driven by external market factors and the weakness of Sterling against the US Dollar – the key currency for all oil purchases and sales. The reality is that the Government hasn’t increased the fuel duty paid on a litre of fuel since 2011/12. This needs to rise consistently over the coming years as a way of encouraging the public to continue changing to fuel efficient vehicles.

Other steps which the Government could introduce are:

  • Introducing a fixed charge on the provision of free car parking for employees. At present, if an employer pays an employee’s train ticket or bus permit, it represents a taxable benefit for the employee, whilst providing the employees with free car parking at (or near) the place of work is a tax-free benefit. If the Government is serious about encouraging green transport, this tax perk needs to be removed.
  • Increase the road taxes paid on the most polluting cars. For example, cars which are over 40 years old in the UK are presently exempt from ‘road tax’. However, such cars are typically more polluting than more modern alternatives. Increasing a significant road tax supplement for the most polluting cars will increase the funds available for investment in bus and train travel, while also potentially encouraging people to purchase greener vehicles.
  • Increasing the taxes on frequent flyers – typically businesspeople. While it may still be appropriate for businesspeople to fly to exhibitions and clients, the tax system needs to realise that flying is a high carbon activity and ensure that businesses are genuinely paying an appropriate charge for these flights. Such an approach would encourage businesses to fully assess whether flying is necessary or whether alternative options – either trains or indeed video calls – are an appropriate alternative to each specific business flight.
  • Developing a system of road tolls – at least in city centres and motorways, which charge people for travelling by car. While this isn’t a ‘quick fix’, as it would require significant infrastructure investment by the Government, it can help people realise the costs of driving and be used to subsidise train or bus travel, for example.

While nobody is realistically calling for all flights or car journeys to be cancelled, the reality is that the tax system presently encourages behaviours which are – in simple terms – environmentally damaging. While trains and buses will never be a perfect answer for everyone – e.g., those living in rural areas, for example, may not have a valid train or bus system – the Government does need to consider how it uses the tax system to encourage greener behaviour from employees and employers. Otherwise, sadly, any agreements which the UK Government signs up to at COP26 will be little more than ‘hot air’.

Contact us

If you would like to discuss any of the above please contact your usual Blick Rothenberg contact or Robert Salter, 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.