Tax and the green recovery from Covid-19

As the country begins to emerge from Covid-19 induced lockdown and businesses prepare to reopen, tax remains a hot topic. The Institute of Directors (IOD) has called on the Government to use its upcoming Economic Statement (expected next month) to make a series of tax changes to stimulate the economy and support employment. For businesses with a strong environmental focus, this may be a prime opportunity to make the case for aligning tax reliefs with a “green recovery” and the UK’s long-term climate goals. 

The IOD warns of potential job losses as the Government’s furlough scheme winds down from August, with employers having to contribute to staff wages, NICs and pensions, alongside gloomy predictions about the return to pre-lockdown business levels and future growth. According to IOD figures, directors’ hiring and investment intentions for the year ahead have hit new record lows. 

The range of tax measures suggested by the IOD to amplify economic recovery includes:

• greater tax incentives for businesses to invest in technology, training and R&D; and 
• support for scale-up and start-up investment by broadening the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) reliefs and making them more accessible. 

The IOD acknowledges the need to promote sustainable business, but confines its recommendations to requiring listed companies to make climate-related disclosures in line with the Taskforce on Climate-related Financial Disclosures recommendations, on a “comply or explain” basis. 

For businesses that see opportunities in aligning tax policy with the UK's climate goals, the following ideas are worth discussing:

•  existing corporate investment allowances and R&D reliefs could be widened further specifically for businesses that can demonstrate a positive environmental impact, or that their models are aligned with the UK’s 2050 target for “net zero” emissions, so that those businesses can offset additional qualifying expenditure (or even more than they spend) against their taxable profits; and
• a Climate Investment Scheme relief, modelled on EIS and SEIS could be created to drive new investment into early stage green businesses at a time when accessing equity may be hard. 

Another measure suggested this week is an emergency cut to the standard rate of VAT to support consumer spending, in a repeat of the decision taken by former chancellor Alistair Darling in the wake of the global financial crisis in 2008. This too could be tailored to support greener spending choices – products with higher embedded carbon costs or other environmental impacts could be subject to a higher rate of VAT, and demonstrably greener options could be subject to VAT at a lower rate. 

This theme is not new to the legal community. Various tax measures are included in the pipeline for model laws published by the Chancery Lane Project, a pro bono collaboration between lawyers from around the world to develop new contracts and model laws to help fight climate change.