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No UK green tax policy review following Skidmore ‘very disappointing’

The UK government will not review tax policy to explore how tax can be used to incentivise decarbonisation to support the country’s transition to net zero, as recommended by a recent independent review, it has confirmed.

A review of the UK government’s approach to delivering its net zero target, published by Chris Skidmore MP, recommended that the Treasury carry out a wide review of UK tax policy to explore how tax credits and capital allowances can incentivise investment in decarbonisation and research and development to deliver on net zero emissions. However, in its response to the review (67-page / 536KB PDF), the government ruled out any such review.

Tax expert Penny Simmons of Pinsent Masons said: “It is very disappointing that the government seems to be unwilling to undertake a full review of how tax policy can support net zero. The government has said it believes that full expensing and a permanent extension of the increased annual investment allowance is enough to encourage green investment – this simply isn’t the case.”

Read more on UK net zero and energy security

Full expensing – a 100% tax deduction for capital expenditure on plant and machinery – is being introduced following announcements by the chancellor, Jeremy Hunt at the Spring Budget. The upfront tax deduction will be available for expenditure on new plant and machinery between 1 April 2023 and 31 March 2026. Full expensing will be available on most plant and machinery. A 50% first year allowance will be available for certain “long-life” capital assets. There is no cap on the amount of the amount of expenditure that will qualify for relief.

A permanent extension of the £1 million annual investment allowance (AIA) was also announced by the chancellor at the Spring Budget. The AIA was due to reduce to £200,000 from 31 March.

“Although full expensing may encourage some green investment, it isn’t enough,” said Simmons. “Full expensing is also a temporary measure and is only being introduced for three years – businesses need longer-term certainty as often, ‘green’ projects last for many years and investments will be made over a much longer period than three years.”

“The lack of any announcement on targeted ‘green’ tax reliefs or incentives is particularly disappointing given the recent tax measures introduced by the US Inflation Reduction Act. The Skidmore report had specifically highlighted that the UK government should consider how tax policy can be used to accelerate the development of new and emerging green markets and low carbon technologies. The UK government is going to need to do a lot more if it is going to attract businesses to choose the UK as a location for green investments,” she said.

The government’s response document states that it will continue to engage with industry and carefully consider how best to incentivise businesses to invest in green technology to help it consider whether there is a case for doing more through the tax system.

Simmons said: “The government’s willingness to continue discussing the issue of green tax incentives provides a glimmer of hope that targeted incentives may still be a possibility. However, given the measures being introduced in the US and elsewhere, the UK government is running out of time if it wants to attract long-term green investment to encourage decarbonisation, combat climate change and support the UK’s economic growth agenda.”

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