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Written by: Sheena McGuinness

Sheena McGuinness

Partner

Tax system needs total overhaul to meet net zero carbon aspirations

On 27 June 2019 the UK became the first major economy in the world to pass laws to end its contribution to global warming by 2050. This net zero target means there will have to be huge changes to many systems. One of the primary levers that Government (and more specifically the Chancellor) has at their disposal to effect change is the tax system. We predict that this will have to undergo a fundamental overhaul in order to even come close to meeting the net zero aspirations.

Brave new world

In tackling a global climate change emergency, it is clear we are going to have to be more than a little bit brave. Tweaking the current taxation system around the edges and bolting on quick fixes is simply not going to deliver a carbon neutral future. 

The tax system in its current form of taxing income was introduced by William Pitt the Younger with effect from 1799 (obviously with updates, new legislation and amendments), so it is no surprise that the fiscal regime no longer dovetails with today’s societal drivers. 

We have seen how failing to take a holistic approach to the system of taxation can lead to illogical results. For example, businesses, schools and hospitals that have installed solar panels and other energy efficient kit into the fabric of their buildings will be adversely impacted with higher business rates. An easy fix would be to exclude such enhancements that fall within energy efficiency criteria from the business rates valuation. However, this would be another quick fix and may be open to abuse or become overly draconian in order to ensure only 'good' enhancements are excluded. 

Catch 22

Responding to climate change will require more government stimulus, and as a nation we are currently running at a net deficit. What is more, tax incentives and interest rate cuts may be necessary in order to stimulate the UK economy post Brexit. With pressure mounting around numerous uncertainties in the economy, not least provision of a clear route map as to what the much-heralded simplified tax system will comprise, this is having a negative impact on the UK markets. To meet the changing fiscal and societal objectives, we predict that the income-based system of taxation will have to be replaced with one in which carbon-based taxes have a much greater role to play.

Great Expectations

The taxation of fuel duties is likely to be the first gating item for the UK Government. Currently fuel duties contribute about 4 per cent of the total UK tax take, an amount that the Treasury simply cannot afford to lose especially in view of the contracting UK tax base. The fuel for electric vehicles (EVs) by comparison attracts no duty. With the ban on all petrol and diesel cars by 2040 (and pressure to bring this forward to 2032) this switch will mean seismic changes – and not just to the tax system.

In order to 'plug' the fuel duty gap there will have to be changes to the basis of collecting these taxes. We have heard talk of a carbon-based tax on road use – our cars are already computers on wheels so we certainly have the technological wherewithal to capture this information in the vehicle. Taking it a step further, it is entirely feasible that we then move to a punitive carbon-based system of taxation whereby 'dirty' vehicles, will be taxed at a higher rate per mile.

Wealth of Nations

Casting the net wider, where is the spotlight likely to fall next? It is entirely conceivable that individuals and businesses could be taxed on their carbon usage. Every time an item is subjected to a process which results in carbon usage a carbon added tax could be applied (similar in concept to the current value added tax).

Turning our attention to carrot, rather than stick. As a form of subsidy or incentive the Government could reward (eg in the form of tax credits) to those that are carbon neutral, or the utopia of carbon negative.

Of Mice and Men

Changing the way we do business is becoming a crucial decision-making criteria for many investors. Large corporates are publishing their Environmental, Social and Governance (ESG) policy in their accounts. We predict this will become a regulatory requirement for large corporates in due course (similar to the publication of the Group Tax Strategy). 

However, we predict the changes to the taxation system will be slow and piecemeal. It may feel like death by a thousand cuts before we get to anything resembling a coherent and holistic tax system that is fit for purpose in the modern world. 

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