Iain Rankin highlights five of the best ‘green tax breaks’ and ‘green loans’ on offer.
Environmental (or ‘green’) taxes are intended to encourage your business to operate in a more environmentally friendly way. You may qualify for reliefs, be exempt from some taxes or qualify for beneficial loans if, for example:
- you use a lot of energy because of the nature of your business;
- you’re a small business that does not use much energy;
- you buy energy-efficient technology for your business.
The UK still lags behind other European countries in offering incentives for environmentally friendly business activity. However, if you know where to look, there are some useful ‘green tax breaks’ and ‘green loans’ on offer.
1. Enhanced capital allowances
Enhanced capital allowances (ECAs) are available in addition to the existing annual investment allowance (AIA). ECAs enable a company to claim 100% first-year capital allowances on their expenditure on qualifying energy-efficient plant and machinery – until April 2020 at least! They grant tax relief to companies investing in new energy-efficient machinery, green cars or water-saving equipment.
With the enhanced AIA temporarily increasing the AIA limit to £1,000,000 from 1 January 2019 for two years, ECAs may seem somewhat obsolete. However, it should be noted that where an ECA claim by a company creates or increases a tax loss, the loss attributable to ECAs can, in some circumstances, be surrendered for a cash credit. Until 31 March 2018, the cash credit was 19%, but is now two-thirds of the corporation tax rate in force for the accounting period; still useful for larger investments or in a company’s first year of trading.
2. Climate change agreements
Climate change agreements (CCAs) are voluntary agreements made by the UK industry and the Environment Agency to reduce energy use and carbon dioxide emissions. In return, operators receive a discount on the climate change levy (CCL), a tax added to electricity and fuel bills for non-domestic users, which rises each year in line with inflation.
The Environment Agency administers the CCA scheme UK wide. The income raised from this tax is used to fund energy efficiency programs, of which the Carbon Trust, a government-funded company that helps businesses cut carbon emissions, is one.
If your business is energy-intensive, such as a printing firm or bakery, you can qualify for a reduction on your CCL of 90% for electricity and a 65% reduction for gas, liquefied petroleum gas, coal and another solid fuel by signing a climate change agreement, in which you would commit to meeting set energy efficiency targets. The most straightforward way to find out more is to contact the trade association for your sector.
3. Interest-free green loans (Scotland and Wales only)
Note - These are now available at a national level only in Scotland and Wales; however, other energy efficiency grants and loan schemes may be available locally.
The Scottish government, in partnership with Zero Waste Scotland, provides support to small and medium-sized Scottish businesses to reduce energy and resource costs by way of a ‘green’ SME loan. This provides unsecured, interest-free loans from £1,000 up to £100,000 for the installation of energy-efficient measures, such as lighting and heating upgrades, double glazing, insulation and much more. Businesses that are successful in applying for one of the loans will also receive 15% cash back on the value, further incentivising them to implement measures to reduce their energy use and carbon emissions. This incentive is open to companies from across all sectors.
The energy efficiency loan fund in Wales, in partnership with the Carbon Trust, similarly helps Welsh SMEs with interest-free loans of between £3,000 and £200,000 to help save money on energy bills and reduce carbon emissions.
4. Tax relief on low-emission cars
Cars do not qualify for the AIA, even if they have low CO2 emissions. However, there are various ways in which cars with low carbon dioxide emissions can save on tax. Firstly, if you are buying a new company car that is either electric or with emissions of not more than 50 grams per kilometre (g/km), you can claim a 100% first year allowance for its full cost – the government has announced other ECAs will only be claimable until April 2020, but the first year allowance for low emission cars has been extended until 31 March 2021.
Although the cost of cars with low emissions can be claimed as first year allowances, cars with higher rates of carbon dioxide emissions above 50g/km should be claimed as follows:
- new company car with CO2 emissions between 50g/km and 110g/km – main rate allowances;
- second-hand company car with CO2 of 110g/km or less (or car is electric) – main rate allowances;
- new or second-hand company car with CO2 emissions higher than 110g/km – special rate allowances.
Cars that are allocated under the main rate allowance can use writing down allowances of 18% per year and cars allocated under the special rate allowance can use writing down allowances at 6% per year. Previously, special rate allowances used writing down allowances of 8%; however, as of 1 April 2019 this has been reduced to 6%.
The taxable benefit to an employee who is provided with a company car to use privately will also be lower for cars with lower carbon emissions. Employees provided with a company car who also use the car for personal use are subject to a benefit-in-kind charge for the private use of the vehicle. Such employees are taxed by taking a percentage of the list price of the car provided to give the amount of taxable benefit.
The percentage used to determine the taxable benefit varies depending upon the CO2 emissions of the car; the lower the C02 emissions, the lower the percentage, resulting in a lesser amount of tax due. In the 2019/20 tax year, low emissions vehicles (up to 50g/km) are taxed at 16% of the list price and diesels at 20% of the list price. As the emissions of the car increases, so does the percentage to determine the taxable benefit. For example, cars with emissions above 50g/km but below 110g/km attract percentages ranging between 16% and 22%; cars with emissions above 110g/km will range from 23% to a maximum of 37%. For diesel cars, 4% is added to these percentages up to a maximum of 37%.
From 6 April 2020, to greater encourage the provision of electric cars and hybrid vehicles, the percentages applied cars with CO2 emissions of up to 50g/km will take into account the range for which the car can be driven using only electric power, starting as low as 2%.
Normally a fuel benefit charge may be due if fuel is provided by an employer for a company vehicle that is also used personally. However, as tax law does not classify electricity as fuel, the fuel benefit charge does not apply to any electricity supplied by an employer to charge an electric car. Therefore, no benefit-in-kind charge arises by the employer paying to charge the vehicle, regardless of the number of personal miles.
Until 1 September 2018, employees could not be reimbursed for the cost of electricity paid for personally but used for business travel, as there was no Advisory Fuel Rate (AFR). As HMRC has now introduced a new AFR, it means employees can be reimbursed up to four pence per mile for business travel without it resulting in a taxable benefit-in-kind.
5. Low carbon transport business loan (Scotland only)
The Scottish government offers interest-free loans of up to £120,000 to Scottish businesses to help lower their transport and travel costs. The loans have a repayment term of up to six years and are funded by Transport Scotland, an agency of the Scottish government.
The ‘low carbon transport loan’ is aimed at supporting businesses in reducing the carbon impact and fuel costs associated with their transport and travel arrangements with new, more efficient alternatives including:
- Pure electric/plug-in hybrid vehicles (up to £35,000 for each new electric vehicle purchased);
- New electric motorcycles or scooters (up to £10,000 for each vehicle purchased);
- New electric/plug-in hybrid HGVs (heavy goods vehicles) (up to £50,000 for each HGV purchased; applications to be considered on a case-by-case basis);
- Vehicle efficiency devices such as telematics systems;
- Video and teleconferencing facilities.
While not all green tax reliefs or interest-free loans will be available or applicable to your business, it is worth doing some research. Energy efficiency projects typically pay for themselves within a few years through the energy cost savings achieved. This makes them attractive investment projects; however, they typically require an initial upfront capital investment.