What roles does VAT play in becoming more eco-conscious?
It would be easy to assume that taxation is just a method of raising money to pay for infrastructure, the NHS, police and many other public amenities that the Government delivers.
Whilst this may be the main aim of most tax policies, the Government has for some time been using taxation as a means to change businesses and individuals’ behaviour.
This is perhaps most clear in its increase to duty on cigarettes, which while funding care for smokers, also discourages people from smoking.
The next big challenge for the UK Government, if not the world, is to become far more environmentally friendly. In fact, the UK was the first major economy to legally commit to reaching net-zero by 2050.
The Government has said that HM Treasury has a major role in reaching this net-zero target.
As part of this, the Department published a report towards the end of last year, which included many policy proposals to use taxation as a means of changing business and individual behaviour.
Its 135-page Net Zero Review explores the key issues that the economy faces in achieving this goal and how tax will play a key role.
In response to this report, the Climate Change Commission asked the Treasury to explore “the full range of policy levers, including carbon pricing, taxes, financial incentives, public spending, regulation and information provision”.
The Treasury isn’t alone in exploring the use of taxation to achieve environmental goals and at the same time as it published its report, the Institute for Government also published a report, Net zero and the tax system.
It concluded that the UK’s use of environmental taxes sends conflicting signals to businesses and the public.
One such area where current policy is at odds with itself is the VAT rules for electric vehicles.
As per the previous article, it pointed out that the VAT rate on electricity to charge EVs is higher for on-street charging (20 per cent) than domestic (5 per cent).
This report also pointed out that most businesses faced an irrecoverable 20 per cent VAT charge when buying an EV, which was at odds with the approach of many other developed nations.
Norway, for example, has a VAT rate on EVs that has been reduced from 25 per cent to 0 per cent to encourage more people to purchase fully electric cars.
The result is that Norway has seen a massive spike in the number of electric car sales as the cost of each vehicle has fallen considerably.
Eco-action on VAT now
The Government is acting on VAT rates now to encourage taxpayers to go green. In the Spring Statement, to help households improve energy efficiency, the Government confirmed that it would extend the VAT relief available for the installation of energy-saving materials (ESMs), effectively reversing the effect of the EC’s infraction proceedings against the UK.
Under the new rules, ESMs will be zero-rated for five years and will then revert to the five per cent reduced rate of VAT.
This new measure also permanently removes the social policy conditions and the 60 per cent test, which businesses were required to consider when determining the VAT liability of ESM installations.
It also brings wind and water turbines back into the scope of the relief.
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