VAT News

Budget March 2020 - Main Environmental Tax announcements

11.03.2020

As with every Budget, the Chancellor has announced measures that will probably draw very different reactions from the business sector and from environmental lobbyists. Energy intensive sectors will broadly welcome the changes announced, but it is difficult to reconcile the rather muted changes being introduced by the Chancellor with the government’s declaration that we are in a ‘climate emergency’.

 Energy

Climate change levy (‘CCL’), the closest thing the UK has to a carbon tax, is being tweaked to further encourage business consumers to move from gas to electricity, on the basis that the increasing level of generation from renewable sources is making electricity the more environmentally friendly option in the future. This nudge is in the form of a steady increase in the rate of CCL applying to supplies of gas until it matches that for electricity sometime before 2025. Given that energy prices are determined mostly by market forces, consumers may not be immediately aware of these rate changes so it remains to be seen whether this measure will have any measurable effect.

Energy intensive sectors have been eligible for very valuable reductions in CCL rates on taxed fuels since the tax was introduced, provided they entered into an agreement with the government (a Climate Change Agreement) to reduce their energy use and emissions by certain levels. The idea was that heavy industry would be able to use the savings in their energy costs to invest in better energy efficiency, and if they failed (as a sector) to meet their agreed reductions they would be penalised accordingly. The CCA regime was due to finish at the end of the current reporting period (2023), but the Budget announces that the scheme may continue – after consultation – for a further 2 years.

There is even less clarity about what the UK will do regarding its likely expulsion from the EU Emissions Trading Scheme (‘EUETS’) at the end of the year. The EU wide scheme is a ‘cap and trade’ regime in which owners of facilities with large emissions (e.g. power stations and large manufacturing sites) must register and acquire adequate emissions ‘allowances’ to meet their agreed targets. If they emit more than planned, they must buy allowances from those who have a surplus or from a suitable market. The EUETS has been a cornerstone in the government’s carbon pricing policy so if the UK is unable to remain affiliated to it after the EU exit transition period, it will either need to establish its own scheme (a ‘UKETS’) or introduce a carbon tax that would have the same effect of underpinning a price for carbon in the UK. The 2018 Budget first announced that a carbon tax might be introduced and legislation was drafted on that basis. This Budget reaffirmed the government’s plans to introduce this tax with effect from 1 January 2021 if membership of the EUETS is not possible and sets out the government’s plans to introduce secondary legislation to manage compliance etc.

 Transport

Air Passenger Duty (‘APD’) has had a fairly high profile over the past year or so, having been considered as a means to provide support (by removing it) for failing domestic airlines, and continued debate about whether it could or should be devolved to Scotland and Wales. The Budget announced an RPI rate increase which, as the effective rates are rounded up to the nearest pound, will lead to an effective freeze in the rate for short haul flights and an increase of £2 - £4 in the rates for long haul depending on class of transport.

Aviation remains a challenging area for any government seeking to introduce fiscal measures to encourage lower emissions. So it is perhaps more significant that the Budget also announced further consultation on broader aviation tax reform in the Spring.

A couple of changes were announced about the use of Hydrocarbon Oil Duty free, or rebated diesel. Rebated fuel is much cheaper than taxed fuel so there have always been strict restrictions about where so called red diesel can be legitimately used. Discouraging the use of fossil fuel is a key part of climate change policy and the Budget announced that entitlement to use rebated fuel will be removed from April 2022 except for use in agriculture, rail and non-commercial heating. There will also be a government consultation about whether there are any other sectors that should be allowed to continue to use the fuel.

Changes to Vehicle Excise Duty (‘VED’) are a little contradictory – from a climate change emergency point of view anyway – in that VED will be frozen for HGVs in 2020-21 to support the primarily diesel fueled haulage sector, but will be removed or reduced for certain zero emission vehicles at the same time. Future policy may be better resolved after the government’s call for evidence about VED and low emission vehicles over the next few months.

 Waste and resources

Landfill tax rates in England will increase in line with RPI. It’s very likely, therefore, that rates for this devolved tax in both Scotland and Wales will also rise to avoid ‘tax tourism’.

Aggregates levy rates will freeze for 2020-21 but the tax may see more fundamental changes after it undergoes a comprehensive review later this year.

A plastics packaging tax was first announced in the 2018 Budget and the plan is to finally introduce the tax with effect from April 2022. The rate will be £200 per tonne of plastic where it comprises less than 30% recycled material, and manufacturers or importers will be required to account for it. But there remains a little nervousness in government circles about the finer details of the tax and yet another consultation is announced to further consider its design.


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