Can VAT be used as an environmental incentive?

LIZ MAHE - DIRECTOR AND MIKE TROTMAN - SENIOR MANAGER, VAT AND ENVIRONMENTAL TAXES AT CENTURION VAT SPECIALISTS Can VAT be used as an environmental incentive?

Since they were first introduced to fill the country’s war coffers, taxes have been an invaluable tool for governments to push through their agendas. They can be used punitively, to get us to stop doing certain things, or as an incentive, with tax breaks encouraging actions.

Analyse a government’s taxes and you will see their priorities. The environment is certainly a case in point. Despite the government repeatedly paying lip service to its commitment to becoming carbon neutral, their actions tell another story. Arguably, this was perfectly demonstrated in October’s budget when Chancellor Rishi Sunak unveiled plans to cut taxes on domestic flights, making this highly polluting mode of transport even cheaper than the already costly, far greener, railways.

However, there are still a myriad of other taxes in place to either punish or promote environmental good behaviours at every level.

It’s probably fair to say that there are currently more punitive environmental taxes than encouraging ones. Fuel Duty, Landfill Tax and the Climate Change Levy (a carbon tax on energy supply for commercial consumers) are probably the most well-known examples of this (although, there might be an argument to be made that after freezing Fuel Duty for the 12th year in a row, this isn’t necessarily being used to its full effect).

In contrast, VAT is being used as a tool to incentivise positive behaviour, offering discounted VAT rates for activities like investment in energy saving materials. Unfortunately, using VAT in this capacity is very prescriptive and difficult to manage. For example, lots of Housing Associations trying to upgrade housing stock and reduce energy consumption find that new energy-efficient boilers or radiators don’t qualify, so is the VAT relief really broad enough in scope to incentivise this work?

Another example is re-insulation work (new cladding). HMRC is being very exacting in what qualifies for the relief so that where a whole house is being refurbished, of which insulation works are just a part, they don’t qualify for the lower rate. It’s a fairly limited scope therefore for many people who are genuinely trying to limit energy consumption.

As VAT Specialists, we’re currently doing a lot of work trying to secure VAT reliefs on recladding blocks of flats. Here a block landlord, who cannot recover the VAT on the recladding, might be able to get the work zero rated for VAT if it was a building they originally had built.

Electric vehicles (EVs) are another case in point. HMRC has set out its policy around EVs – applying the standard rate of VAT to electricity used to charge the car. Also, the rules for businesses reclaiming VAT on charging costs are very restrictive, meaning that some EV owners are actually slightly worse off than owners of petrol and diesel cars.

There’s no real VAT recognition of the environmental benefits of using EVs. Now that the UK is outside the EU, the government has greater freedom to apply VAT rates as it sees fit, including zero rating supplies that have a positive environmental impact.

However, they would need to address any revenue lost from that source so there is only likely to be a certain number of zero and reduced rates in play at any one time.