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22nd January 2024

Partner insight: How VAT and tax can be used to influence a business’ green agenda

Chamber Partners Centurion VAT, the Indirect Tax team within the newly formed Xeinadin Accounting Group, started a conversation among members at the Chamber’s regional networking event at Penderyn in Swansea on Tuesday 16 January. The topic? How VAT and environmental taxes can be used to influence both an individual and a business’ green agenda.

Liz Maher OBE and Mike Trotman were on hand to provide the technical input and illustrate the way in which either the threat of a tax charge, a relief from VAT or an exemption from environmental taxes are being used.


Driving forward

There was much discussion over how VAT affects electric vehicles. Currently, VAT is charged at 20% on the sale of new cars. December saw the one millionth EV to hit the roads but towards the end of the year a decline in purchasing was noted. Government grants being removed could have influenced that and the SMMT has been raising the question of removing the VAT charge on new cars to increase take up of new EVs.

VAT on business related costs is normally recoverable by a VAT registered business as long as the costs support a taxable business activity. But there is a blocking order on VAT recovery of new cars which means that VAT on a new car is a real cost to that business. Would a 20% reduction in the cost of an EV promote take up? Chamber members certainly felt that would help but there is still the issue of accessibility of charging points. For some businesses the time, range and cost of public charging remains a barrier to widespread adoption as company vehicles.

On the VAT side there is a lot of activity on the installation of EV charge points, but the issues reflect again that VAT on EV charging is levied at 20% even though small supplies of “domestic” levels of fuel and power can access the 5% VAT rate. It is also important for businesses installing chargers for staff or public access use to be clear on the treatment of any income they generate from providing that access – are they leasing a site to a third party or is the business the entity that is making the supply of EV charging? The devil’s in the detail.

In terms of a business being able to recover the VAT its staff incur on business journeys then VAT recovery from public charging point charges would be possible, but HMRC is still not open to a business being able to recover VAT on the costs an employee incurs when charging their company car at home.


It’s all material

Another important VAT influencing factor as we strive to reduce our carbon footprint is the supply and installation of energy saving materials. Should you choose to have green energy generating material installed at your home then you’d expect to benefit from a 20% VAT saving on that cost from the installer – that would certainly be a help with solar panels, ground source heat pumps and the like. Water source heat pumps will be added to the qualifying materials list from 1 Feb.

This VAT relief – in place until March 2027 – would be a great benefit to residential landlords including those in social housing or student accommodation for universities and colleges. The relief is based on the building being residential, limiting the benefits for business. The logic being that a business should be able to recover VAT on the costs relating to its commercial building, but this misses the fact that businesses involved in areas which are VAT exempt – health and welfare, finance, insurance, property – are blocked from full VAT recovery.


Tax time

There are also an increasing number of bespoke taxes which are targeted at specific sources of carbon emissions or behaviours. These vary from carbon taxes (climate change levy, hydrocarbon oil duty and carbon price support mechanisms), and resource taxes (aggregates levy and plastic packaging tax), to waste taxes (landfill tax) and tourism taxes (air passenger duty). The result is a patchwork quilt of environmental taxes and tax incentives which adds complexity to any organisation’s plans to improve its carbon footprint.

The UK will implement a carbon border adjustment mechanism (‘CBAM’) by 2027. This will be quite a significant step up in the UK’s use of tax in the fight against climate change. It has long been understood that domestic measures taken by any country to reduce emissions can only really have an impact domestically. So, emissions arising on production of goods shipped into the UK would lead to carbon leakage, and if UK manufacturing is to compete on a level playing field with overseas competitors, then imports must be held to the same carbon efficient standards (and carbon levies) as products manufactured here. Initially, the CBAM will place a price on only the most emissions intensive industrial goods (aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel), but the race to beat climate catastrophe is likely to require a broadening of the industries included.


There are a range of facts that influence the investment we make in reducing our carbon footprint and the message from Liz and Mike was not to forget the role that VAT and environmental taxes have in that discussion.

Unlike VAT charged to a business that may be recoverable by them, the charges from environmental taxes are an absolute cost, as unless you can find an exemption it has to be paid and effectively is passed on the customers in that supply chain. Often – as Mike explained – with larger building projects using material reclaimed from the site, dredged sand at a port project or in manufacturing from importing chemical products in plastic containers – you can inadvertently fall into these tax areas. This creates unexpected costs before a business even has the opportunity how to consider how to change its behaviour to mitigate its carbon footprint.

Contact us via:  IndirectTax@Xeinadin.com

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