Every pound counts

There are a wealth of opportunities for businesses to improve their bottom lines through good environmental practice. And the incentives, and penalties, are significant, writes Mark Simpson.

The EU commission has released a 16-page Green Paper that outlines its vision on reducing harmful emissions in the European Union.

Targeted subsidies, tradable emissions rights and indirect taxation are all being used to cajole business to take real action on environmental sustainability. Taxation is seen as a key incentive, one that is preferable to regulatory initiatives that are seen as offering less flexibility, less compunction to pursue technological innovation and less effective in supporting employment with environmental objectives in mind.

Whether or not the EU’s environmental goals are realistic, achievable, or ambitious will be irrelevant if business is unpersuaded that it is in its interests to be greener.

Some businesses will be greener because the owner or the management sees the collective benefit: what is the point of huge profits if there is no planet on which to spend them?

Many businesses are not governed by sentiment, collective responsibility or common sense, but by the euro, the pound and hard currencies. So, for real environmental progress to be made, there has to be a real economic case.

If the company can gain some benefit, using its green credentials in its company literature and PR and sales patter – even better.

If it measures up bottom line, everything falls into place – the discussion is won.

What’s on offer?

Green taxes are weighted towards business rather than the consumer or homeowner. Not one against another. There is much more legislation encouraging businesses to get on board. Whether savings made on VAT on the installation of such materials as solar panels and insulation material or exemption from stamp duty on carbon-neutral homes for consumers will help balance out the emphasis of green economic incentives is another matter. Let’s look at what is on offer:

Thermal insulation of industrial buildings

For those that have already explored some of the green tax options this will be old news indeed. Nevertheless, it is worth looking at if you are not familiar with it.

This relief identifies expenditure on the thermal insulation of industrial buildings as plant for capital allowances purposes. This now becomes of particular importance, as the industrial buildings allowance (IBA) is being phased out, while capital allowances on plant will remain, albeit in a revised form.

Thus a business which has in the past claimed IBAs on such expenditure might now find it beneficial to reconsider that approach, and seek to establish a claim to plant and machinery capital allowances instead. It may or may not be possible for this to be retrospective, depending upon the specific circumstances.

Enhanced capital allowance

An enhanced capital allowance is a 100% up-front tax deduction for investment in designated energy saving and environmentally beneficial plant and machinery. Full details of eligible items can be found on a dedicated website, www.eca.gov.uk. Such items fall into three categories:

  • Energy-saving plant and machinery

    Items eligible for relief are listed on either the Energy Technology Criteria List or The Energy Technology Product List, managed by the Carbon Trust on behalf of Defra. The lists cover such items as air-to-air recovery technology, combined heat and power, radiant and warm air heating and solar thermal systems.
  • Low-CO2 emission cars

    You will need to hurry to take advantage of this one, as the relief expires on March 31, 2008. It applies to cars producing CO2 emissions below 120g of carbon per kilometre, such as the Toyota Prius. See below for the replacement regime effective from April 1, 2008.
  • Environmentally beneficial plant and machinery (water technology)

    Items eligible for relief are listed on the Water Technology Criteria List or the Water Technology Product List, www.eca-water.gov.uk. The list covers items such as efficient taps, toilets and showers, leakage detection equipment, efficient industrial washing machines and cleaning equipment, and vehicle-wash waste reclaim units.

    With effect from April 1, 2008, it is intended that loss-making companies (not partnerships or sole traders) will be able to surrender losses arising from expenditure qualifying for ECAs for a cash tax payment. Details of this relief are yet to be finalised.

Environmentally-beneficial fixtures integral to buildings

A number of such items are currently regarded as part of the building for capital allowances purposes, and are thus ineligible for capital allowances. The government is consulting, as part of its proposals to amend the capital allowances system, on including these as items eligible for the new 10% allowance on integral fixtures.

The proposed new treatment would apply to such items as Brise Soleils and Active Facades, used to provide a measure of passive solar heating in modern buildings.

Car and fuel benefits

The government approach in this area has elements both of carrot and stick. The level of car benefits has, since April 2002, been measured by reference to CO2 emissions, and fuel benefits were brought into line in this respect in April 2003. From May 2007, a similar system applies to VAT fuel scale charges.

From April 2008 there will be a new 10% of list price charge for cars with CO2 emissions of 120g per kilometre or below (currently the percentages range from 15% to 35%). There is also a discount of 2% on the applicable percentage for cars capable of being driven using liquefied petroleum gas (LPG), and that percentage is the lower of the figures relating to the car running on petrol and on LPG. This same discount will apply from April 2008 to cars manufactured to run on E85 fuel. This is a road fuel that is 15% petrol and 85% ethanol.

Contaminated land

Where a company (not a sole trade or individual) incurs costs on remediating contaminated land, it can claim a 150% corporation tax deduction for the cost. The land (or buildings) must be in the UK, and must have been contaminated prior to acquisition (not by the purchaser.) Relief is available for employee, subcontractor and materials costs, and extends to asbestos removal.

The Landlords’ Energy Saving Allowance (LESA)

This is a 100% up-front allowance for expenditure on energy-saving items in a UK property business. Prior to April 2007 it covered:

  • Cavity wall insulation
  • Loft insulation
  • Hot-water system insulation
  • Draught-proofing

It has now been extended to include floor insulation. The other major change in 2007 has been to increase the available LESA from £1,500 per building to £1,500 per property, which is advantageous to landlords owning multiple flats or apartments in a single building.

LESA applies only to residential property, and does not apply to property under construction, furnished holiday lettings or property eligible for rent-a-room relief.

Summing up

The EU wants “member states to find the right balance between incentives and disincentives”.

The tax incentives show it is sincere and serious in its aim to encourage greener business. The incentives that are given will be mirrored by more penalties for those that pollute.

It all makes business sense to take what is on offer. Savings are not nominal. They are not uninviting. They are not restricted to obscure activities. They are real. It is not every penny that counts, it is every pound – and many thousands of them.

This policy of inducements and penalties has just begun. Expect more green taxes. Investigate what is available now. We are at the start of a road to more environmentally friendly business. The changes above are just a marker of things to come.

Mark Simpson is a tax planning director at Simpson Burgess Nash, an accountancy. His email is [email protected]


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