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A Sustainable Budget?
Jonathan Arch and Karen Potts, Andersen*

Green taxation has become a way of life in the UK. Over recent years, the Chancellor has increasingly encouraged businesses and individuals to adopt an environmentally-responsible attitude, through imposing taxes and levies on environmentally-damaging activities, whilst incentivising "sustainable" behaviours. Indeed the Chancellor's enthusiasm for such measures continues. Budget 2002 consolidates and expands existing measures, introduces new initiatives, and identifies further areas for future consideration. Historically, green taxation has tended to increase costs (which has the added bonus of raising revenues). However, in a recent survey over half the respondents thought that tax incentives were the most effective way of encouraging 'green' behaviour.

Budget 2002 has introduced several new key incentives, suggesting that the Government is trying to achieve a better balance between incentives and costs. Budget 2001 focused on urban regeneration through contaminated land credits, enhanced capital allowances and reductions in stamp duty and VAT, and saw the introduction of the Climate Change Levy to encourage energy-use reduction. There were also measures to encourage sustainable use of natural resources and the proximity principle, reduce waste, and promote business efficiency including levies on aggregates and fuel, tax incentives for the haulage industry and enhanced capital allowances on environmental technologies. Budget 2002, has continued these themes:


Urban Regeneration

Budget 2001 introduced a new 150% accelerated tax credit to reduce the cost of remediating contaminated land. The interpretation of 'contaminated land' has recently been extended to include other 'decontamination' activities such as clearing asbestos from buildings.
Following the reduction in rates of stamp duty for disadvantaged areas in Budget 2001, all property transactions in disadvantaged areas, such as areas with high unemployment, have now been exempted from stamp duty.
In Budget 2001, the Chancellor also introduced a number of accelerated tax depreciation measures - known as Enhanced Capital Allowance ("ECA") schemes - such as 100% tax allowances on expenditure for renovation or conversion of space above shops. Budget 2002 has significantly expanded this scheme.


Climate Change Levy (CCL)/Energy Use

Rates of CCL introduced in April 2001, remain unchanged, and new exemptions for electricity generated by combined heat and power or coal mine methane have been introduced. There will also be a tightening of the penalty provisions for those incorrectly charging or incorrectly claiming exemptions from CCL.
The government has introduced several new incentives in order to encourage individuals and companies to purchase more environmentally friendly vehicles. These include:

100% ECAs for businesses purchasing low-emission cars, and associated refueling equipment, for use in their business or by their employees; a new reduced band of vehicle excise duty (VED) for efficient 'low-carbon' cars;

reduced fuel duty for sulphur-free petrol and diesel in 2003;

exemption of hydrogen from fuel duty to encourage early take-up (subject to the results of a pilot project);

a reduced rate of VED for motorcycles reflecting their benefits over cars, especially for commuting.


Although fuel duties have remained unchanged, the Chancellor has increased the rate of corporation tax on oil and gas production from 30% to 40%. With time, it would be surprising if this did not cause a cost increase at the petrol pump.
The 100% ECAs on eight specified technologies which meet energy saving criteria will be extended to include a further five new technologies. These ECAs have also been extended to companies purchasing assets for leasing, letting or hire representing a significant expansion of the relief.


Use of natural resources

The Aggregates Levy (�1.60/tonne of virgin sand, gravel and crushed rock) came into effect on 1 April 2002 despite opposition from industry and the lack of finalised legislation (this will be published in Finance Act 2002). The levy has been extended to include uncrushed rock, and penalties have been introduced for those incorrectly claiming an exemption. Criteria for the 'Sustainability Fund' associated with the levy, which will provide �60M over two years, have now been announced:

reducing demand for 'primary' aggregates;

promoting environmentally friendly aggregate extraction and transport;

offsetting the local effects of aggregate extraction.

The increase in employees' National Insurance (NI) from next year will decrease disposable incomes. Indirectly, could this decrease consumer spending on those "luxury" items which perhaps disproportionately consume natural resources and generate waste?


Proximity Principle

As expected following consultation, Budget 2002 introduces a distance-based charge for lorries. This will come into effect in 2005 or 2006. The Government has indicated that this will be offset by tax cuts for the haulage industry and thus 'revenue neutral'.
The package of measures aimed at stimulating the growth of small businesses, including a reduction in the starting rate of corporation tax from 10p to zero and simplification of the VAT regime, should also assist in providing local employment opportunities.


Waste

The standard rate of landfill tax has been increasing by �1 a year since 1999 and will continue to escalate, reaching �15/tonne in 2004. However, the Government believes that landfill tax will need to be increased significantly in the medium term - a decision will be made following the Performance and Innovation Unit's waste review. In addition, a consultation exercise is underway relating to the landfill tax credit scheme regarding both funding mechanisms and future priorities.


Business Efficiency

The tax credit for Research & Development brought in for small and medium-sized enterprises two years ago will now be extended to larger companies. The 25% rate of tax corresponds to an effective injection of �400M per year into activities promoting business innovation and efficiency.
Improved efficiency has been the focus of activity for many businesses in recent months. The increase in employers' NI from next year will further incentivise companies to examine their processes and identify further cost saving opportunities. Will the increasing costs of employment, force businesses to consider alternatives to the use of labour?


What Next?

For the future the Chancellor has indicated that we should continue to expect further use of economic instruments to encourage environmentally responsible behaviour. These could include:

Consultation on the tax treatment of waste oil when used as a fuel;

Measures in respect of agricultural pollution (including nutrient pollution) which may include a tax on pesticides;

A possible 'incineration' levy;

Legislation addressing the environmental impact of aviation.

Green taxation is here to stay. If we do not change our behaviour, we should expect to pay more.


* Jonathan Arch is a Senior Manager in Andersen's Environmental Risk Consulting team. Karen Potts is a Partner in Andersen's Corporate Tax group with a specialism in green taxation. The survey presents the results of a poll on the Andersen website between 2 - 9 April 2002.