CBI: Tax system should reward firms for going green

Businesses should be incentivised through the capital allowance system to improve the energy performance of their buildings, such as by installing heat pumps, the CBI has urged.

In a new report, Greening the Tax System, published today (11 March), the business body has proposed a swathe of changes that the government could put forward when it launches a series of tax consultations later this month.

The report says businesses should be incentivised to upgrade their energy, waste management and pollution prevention systems, which it says are responsible for a “significant element” of greenhouse gas emissions.

As an example of how businesses should be incentivised to upgrade their energy systems, it says higher capital allowance rates could be used to encourage buildings currently using natural gas to be retrofitted with heat pumps.

To qualify for the higher rates, the upgrade could be linked to the improvements in the building’s energy performance certificate (EPC) rating bands or other measures of environmental performance.

The report also recommends exempting upgrades which improve the energy performance of buildings from business rate hikes.

The impact of installing plant and machinery items, such as solar panels, on business rates bills is often the tipping point that dissuades businesses from not going ahead with such improvements, it says.

“The costs associated with improving the property outweigh the benefits and can make the investment commercially unviable.

“This means that too often these investments do not take place, which is out of kilter with the government’s net-zero ambitions.”

The report proposes a minimum 12-month exemption on any business rates increase associated with property improvements, which could be extended for those that boost the building’s EPC rating.

On carbon pricing, the report says the tax treatment of the UK emission trading system (ETS) must be set out “as soon as possible”.

“Having early visibility of the trajectory of carbon pricing in the UK will allow businesses to plan and make long term investments in emission reduction projects with confidence. It is vital that any long-term plan is honoured, or it would have the opposite effect, undermining investor willingness to commit.”

And the CBI says the VAT rate for electric vehicles should be cut either alongside the current plug-in grant or after the scheme ends in 2023. This move is designed to encourage the uptake of smaller electric vehicles, which the report says remain “much more expensive” than equivalent internal combustion models.

Rain Newton-Smith, CBI chief economist, said: “A tax system which discourages polluting behaviours and rewards greener alternatives is critical to unlocking the right kind of investments. It must put carbon reduction above carbon off-setting to send the right signals. And it must ensure that the shift to net zero is a ‘Just Transition’, meaning the cost does not fall to those least able to pay.”