9 January 2021
Environmental taxes are designed to tax behaviour that is harmful to the planet's health. They are based on a simple principle — those who pollute, pay.
Development in a green economy will require large scale changes in the behaviour of households, businesses and governments. Taxes and other market-based instruments are key policy instruments for incentivising businesses to reduce their environmental impact and to adopt more environmentally friendly processes.
There are six main policy instruments either in force or expected to come into force in the near future:
· Climate Change Levy (CCL)
· Emissions trading scheme
· Capital allowances on energy-efficient items
· Landfill tax
· Aggregates levy
· Plastic packaging tax
1. Climate Change Levy
Climate Change Levy (CCL) is paid at the main rates for business energy suppliers.
Main rates
You pay CCL at the main rate on:
Electricity;
Gas;
solid fuels - like coal, lignite, coke and petroleum coke.
The CCL main rates are listed on your business’s energy bill.
As a business energy supplier, you’re responsible for charging the correct levy to your customers.
The levy rate varies for each commodity:
kilowatt-hours (kWh) for gas and electricity;
kilograms for all other taxable commodities.
Whom it applies to
You pay the main rates of CCL if your business is in one of the following sectors:
industrial;
commercial;
agricultural;
public services.
You do not pay the main rate of CCL on certain supplies, for example, if you’re a:
business that uses small amounts of energy;
For example, if a metered supply to you at any premises where the electricity (together with any other electricity provided to him at the same premises by the same supplier) is provided at a rate not exceeding 1,000 kilowatt-hours per month.
domestic energy user;
charity engaged in non-commercial activities.
Exempt Fuels
Electricity, gas and solid fuel are normally exempt from the main rates of CCL if any of the following apply:
they will not be used in the UK
they’re supplied to or from certain combined heat and power (CHP) schemes registered under the CHP quality assurance (CHPQA) programme
they’re used to produce electricity in a generating station which has a capacity of 2MW or greater
they will not be used as fuel
they’re used in certain forms of transport
other exemptions and reliefs.
Reduced rates
You can get a reduction on the main rates of CCL if you’re an energy-intensive business and have entered into a climate change agreement (CCA) with the Environment Agency.
Energy-intensive businesses can get a 90% reduction for electricity and a 65% reduction for gas, liquefied petroleum gas (LPG), coal and other solid fuel.
You can check if the processes you run are eligible for inclusion in a CCA by reading the summary in Appendix A of the CCA operations manual:
Your industry trade association can also give advice.
For the main and reduced rates please see the table below.
2. Emissions trading
The UK Emissions Trading Scheme (UK ETS) affects businesses from energy-intensive sectors - like the energy industry and certain manufacturers. A UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU ETS on 1 January 2021
It lets you buy and sell greenhouse gas emission allowances to reduce your organisation’s environmental impact.
The UK ETS will apply to energy intensive industries, the power generation sector and aviation. It covers activities involving combustion of fuels in installations with a total rated thermal input exceeding 20MW (except in installations for the incineration of hazardous or municipal waste).
If you carry out an activity covered by the UK ETS, you will need a greenhouse gas emissions permit.
Northern Ireland electricity generators shall remain in the EU ETS by virtue of the Ireland / Northern Ireland Protocol.
How it works
If your business is covered by the UK ETS you must meet targets by:
cutting your business emissions;
trading emissions allowances.
You’ll need to open an UK Registry account so you can trade allowances.
Auctioning and market operation
Auctioning will continue to be the primary means of introducing allowances into the market. Participants will also be able to trade allowances on a secondary market.
The auction calendar confirms the volume of allowances available in each auction. The 2022 auction calendar was published on 3 November 2021. There is the potential for minor revisions to the 2022 auction calendar once volumes for aviation free allocation are finalised. The 2023 Auction Calendar will be published in the second half of 2022.
Auctions can clear, with allowances being sold to bidders, without all allowances being successfully bid for. Any remaining allowances not sold in an auction are redistributed across the following four auctions up to 125% of those auctions’ original number of allowances. Above this limit, allowances will transfer into the market stability mechanism account.
3. Capital allowances on energy-efficient items
You can claim capital allowances when you buy energy-efficient or low or zero-carbon technology for your business. This reduces the amount of tax you pay.
First-year allowances
If you buy an asset that qualifies for first-year allowances you can deduct the full cost from your profits before tax.
You can claim first-year allowances in addition to the annual investment allowance - they do not count towards your AIA limit.
What qualifies
You can claim ‘enhanced capital allowances’ (a type of first-year allowances) for the following energy and water-efficient equipment:
some cars with low CO2 emissions;
energy-saving equipment that’s on the energy technology product list, for example, certain motors;
water-saving equipment that’s on the water-efficient technologies product list, for example, meters, efficient toilets and taps;
plant and machinery for gas refuelling stations, for example, storage tanks, pumps;
gas, biogas and hydrogen refuelling equipment;
new zero-emission goods vehicles.
You cannot normally claim on items your business buys to lease to other people or for use within a home you let out.
How to claim
Claim on your tax return.
If you do not claim all the first-year allowances you’re entitled to, you can claim part of the cost in the next accounting period using writing down allowances.
4. Landfill Tax
You pay tax on top of your normal landfill fees if your business gets rid of waste using landfill sites.
If you get rid of waste at sites not authorised for landfill, you’ll be charged Landfill Tax. You may also have to pay a penalty or be taken to court.
You can get tax credits if you send waste from landfills to be recycled, incinerated or reused.
What to pay
The tax is charged by weight. There are 2 rates. You pay the lower rate on ‘inactive waste’ - for example rocks or soil.
Material sent to landfill | Rates from 1 April 2021 | Rates from 1 April 2022 | Rates from 1 April 2023 |
Standard rated | £96.70/tonne | £98.60/tonne | £102.10/tonne |
Lower rated | £3.10/tonne | £3.15/tonne | £3.25/tonne |
Loss on Ignition (LOI) testing regime
If your landfill site accepts waste fines, you may need to carry out a loss on ignition test to help determine the rate of tax to pay.
Exemptions
You do not have to pay Landfill Tax on:
dredging activities;
quarrying and mining;
pet cemeteries;
inactive waste used for filling quarries.
2. Aggregates Levy
This is a tax on sand, gravel and rock that’s either been:
dug from the ground;
dredged from the sea in UK waters;
imported.
What you need to do
You must register with HMRC if your business exploits aggregate in the UK, for example, if you’re a quarry operator.
Every quarter, you must tell HMRC how much aggregate you’ve produced or sold.
How much you pay
You pay the tax of £2 per tonne of sand, gravel or rock. You pay less on smaller amounts, for example, £1 on half a tonne. You still pay tax if you import the materials.
Reliefs
You can get tax relief if you export aggregates or use them in some industrial or agricultural processes. If you do not use the material as aggregate it may be eligible for relief.
Exemptions
Certain materials are excluded from the tax, for example, soil, vegetable or other organic matter.
6. Plastic Packaging Tax
This tax will be introduced from April 2022.
Who is likely to be affected
UK manufacturers of plastic packaging, importers of plastic packaging, business customers of manufacturers and importers of plastic packaging, and consumers who buy plastic packaging or goods in plastic packaging in the UK.
To mitigate against disproportionate administrative burdens in comparison to the tax liability for those who are likely affected, there will be an exemption for manufacturers and importers of less than 10 tonnes of plastic packaging per year.
General description of the measure
This is a new tax that will apply to plastic packaging manufactured in, or imported into the UK, that does not contain at least 30% recycled plastic. Plastic packaging is packaging that is predominantly plastic by weight.
It will not apply to any plastic packaging which contains at least 30% recycled plastic, or any packaging which is not predominantly plastic by weight.
Imported plastic packaging will be liable to the tax, whether the packaging is unfilled or filled.
Impact on business including civil society organisations
It is expected that the impact of the new Plastic Packaging Tax on businesses will be significant.
One-off costs include familiarisation with the new rules, training for staff, registration with HMRC, and developing the required reporting framework to complete tax returns.
Continuing costs could include completing, filing and paying tax returns, keeping appropriate records (including those required to claim the export credit), and amending returns. There will also be new registrations and de-registrations each year. In addition, joint and several liability requirements mean some businesses or civil organisations will need to conduct due diligence on their supply chain or take action following notification of wrongdoing by a taxpayer they are connected with.
Conclusion
Environmentally related taxes can provide significant incentives for innovation, as firms and consumers seek new, cleaner solutions in response to the price put on pollution. Expanding the use of environmentally related taxes can play an important part in growth-oriented tax reform, shifting the burden from corporate and personal income taxes and social contributions towards taxes that have less of a negative effect on investment and labour supply.
By imposing a direct cost on the polluter, taxes, in addition to providing incentives for pollution abatement, also encourage innovation to seek out new products and processes that can reduce the polluters’ tax burden. This innovation both reduces emission levels for a lower economic cost, as well as lowers the tax burden on the polluter (or provides a revenue stream to a third-party inventor).
For further information on any of the points above contact
Mikita Makayou at mikita@lexefiscal.com, or
Dr. Frank at clifford.frank@lexefiscal.com.