ESG x Tax in the UK Spring Budget 2023

A growing focus on tax measures with an environmental impact

As noted in our overview of Budget measures here, there were a number of tax announcements dealing with environmental issues as the government seeks to meet its commitment to net zero. Some of these we knew were coming, such as the generous allowance (at 80% rather than 29%) in the Energy Profits Levy incentivising qualifying expenditure on decarbonising upstream oil and gas production. Others were perhaps more unexpected, such as the Chancellor’s announcement that the government will be making “up to £20 billion available for Carbon Capture, Utilisation and Storage (CCUS)”, which will include new tax incentives to encourage repurposing of oil and gas ring-fenced assets for CCUS activities.

As well as these more headline-grabbing announcements on decarbonisation, there were other smaller steps which show how, increasingly, the tax code is being used to incentivise businesses to adopt environmentally-friendly practices. Examples of this include:

• Climate Change Levy (CCL) rates for gas and solid fuels increasing;
• A consultation on extending the Climate Change Agreement scheme which provides for reduced levels of CCL to be paid by those meeting energy efficiency targets;
• A new call for evidence on options to reform VAT relief for the installation of energy saving materials;
• A review of how the landfill tax system works to see if this can better support the UK’s environmental objectives;
• Amendments to the HGV levy to link this more closely to the environmental performance of vehicles; and
• A consultation which, amongst other things, explores whether tax reliefs could be reformed to encourage long-term land use change from agricultural to environmental use.

Social – promoting fairness and transparency in the tax system

Much of the narrative around international taxation in recent years has been around whether businesses and individuals are acting in a fair and transparent way when it comes to tax. Societal expectations have shifted such that businesses can no longer be seen to be engaging in aggressive tax planning. The OECD’s two-pillar project (for more on which see here) is intended to ensure that multinationals pay their “fair share”. Whilst there was speculation that the UK might seek to distance itself from the OECD’s global minimum tax (the so-called “pillar two”), the UK at the Spring Budget reconfirmed its commitment to implementing key aspects of the minimum tax into UK law with effect from 31 December 2023.

Another “social” aspect of tax measures is around building trust in the tax system and the way businesses handle their tax affairs. A key part of this is the introduction of measures ensuring transparency around the tax affairs of businesses, and this is a trend we are seeing on a global scale. Whilst the Budget proposals for the most part simply consolidate existing disclosure and exchange of information requirements, such measures are now seen as an important tool in the armoury.  Businesses will be subject to increased scrutiny from tax authorities and the public, with the potential for reputational damage if they are not seen to comply.

Governance – encouraging behavioural change in relation to tax evasion and avoidance

Making sure tax compliance procedures are in place is no longer the sole remit of the tax director. A trend, that began with the Corporate Criminal Offence (CCO) back in 2017 whereby corporates face criminal liability if they fail to put in place reasonable procedures to prevent associated persons from criminally facilitating tax evasion, continues in the Spring Budget. The government announced it will consult on expediting the disqualification of directors of companies involved in promoting tax avoidance. Furthermore, it is considering making it a criminal offence to fail to comply with a notice to stop promoting a tax avoidance scheme. The use of more severe sanctions in situations involving tax avoidance (as opposed to tax evasion) is an indication of the direction of travel in terms of clamping down on (aggressive) tax planning.