Calls grow for UK net zero tax review following Skidmore report

The recommendation was included in a wide-ranging review of the UK government’s approach to delivering its net zero target (340-page / 6.6MB PDF), published by Chris Skidmore MP last week. Skidmore recommended that any such review of tax policy is completed by the end of this year.

Tax expert Penny Simmons of Pinsent Masons welcomed the findings in the report. “The latest calls for a tax review echo previous recommendations in the Climate Change Committee’s 2022 report to parliament on progress in reducing emissions (619-page / 14.4MB PDF) and will hopefully provide the government with the impetus needed to allocate resources for a comprehensive review of how the UK tax system can support the net zero transition,” she said. “To date, there has been limited discussion from the government about the role of tax policy in supporting decarbonisation.”

The report details how tax policy is being used by other countries to drive investment in decarbonisation. It references both the Canadian government’s recent introduction of a tax credit for hydrogen production, and US tax incentives in the Inflation Reduction Act to encourage energy efficiency and investment in decarbonisation.

“It is interesting that the report stops short of recommending that the Treasury should pursue a policy of using taxation as a way of incentivising investment, rather that it should explore whether introducing tax reliefs will increase investment in decarbonisation and, therefore, how tax policy can be used to encourage business investment,” said Simmons.

“The report acknowledges that revenue support in the form of loans, grants and government funding may be more effective than tax incentives in some circumstances, particularly given the current cost pressures that businesses are facing. It is asking the Treasury to do the research and continue the conversation,” she said.

The report highlights that the UK needs to accelerate development of new and emerging green markets and low carbon technologies and recommends that the government considers how the capital allowances regime can be used to support this. It specifically recommends that the Treasury considers introducing a successor to the ‘super-deduction’, which is due to end in March, with a focus on increasing investment in low-carbon technologies.

The capital allowances regime provides tax relief for a business on qualifying costs on certain capital assets, such as plant and machinery. A 'super-deduction' of up to 130% is available to companies investing in qualifying new plant and machinery between 1 April 2021 and 31 March 2023.

The report also recommends that by Autumn 2023, the government should review how to incentivise greater R&D for net zero innovation, including considering the role of R&D tax credits.

Simmons said: “The recommendations on reviewing R&D tax credits are timely given that the Treasury has just published a consultation on R&D tax credits, with a view to introducing a new single scheme, based on the existing RDEC, which predominantly targets larger businesses”.

“It is also interesting that the Skidmore report references evidence from the OECD in 2020 that suggests that R&D tax credits targeting smaller businesses are more effective at stimulating R&D investment than those targeting larger businesses. This evidence conflicts with the Treasury’s view that additionality in the current SME tax scheme is lower than the RDEC. It is hoped that Treasury carefully considers the recommendations of the report as part of the R&D tax consultation process, particularly when determining whether more generous support should be provided for different types of R&D,” she said.

The Treasury has opened a consultation on plans to introduce a new single R&D tax relief system based “as much as possible” on the existing Research and Development Expenditure Credit (RDEC) scheme for larger companies. According to the government, a single scheme based on the RDEC would be simpler for claimants to apply and would simplify the UK tax system; and further provide certainty of tax relief at an earlier point, making it more attractive to investors.