Recommendation 34

HM Government · verbatim extract Acknowledged

The Government recognises that it will need to act to maintain public finance sustainability as the UK transitions toward net zero, to ensure that Government can continue to fund other public service priorities. The Government also recognises the important role that taxation, alongside other policy levers like regulation and spending, can play in putting a price on environmental externalities, thereby encouraging businesses and consumers to reduce their environmental impact while directing private investment into clean technology. The Carbon Price Support, which taxes fossil fuels used in electricity generation, is recognised as one of the main drivers of the significant decline in electricity sector emissions and coal generation in Great Britain over recent years. Over the last decade, coal consumption has fallen by 84 percent. The Government maintains and keeps under review a number of environmental taxes, which allows us to better target policies, set appropriate rates for varied taxpayers, and smooth revenue volatility to support public spending. 35. The Government now has the latitude to propose the variation, or the abolition, of value added tax on certain categories of goods. We recommend that the Chancellor of the Exchequer bring forward proposals to reduce the rate of VAT on repair services and products containing reused or recycled materials to increase the circularity and resilience of the UK economy. The Government should also reduce VAT on green home upgrades to incentivise more people to install low-carbon technologies and improve the energy efficiency of existing homes. (Paragraph 226 of the EAC report) VAT is a broad-based tax on consumption and the twenty per cent standard rate applies to most goods and services. While there are exceptions to the standard rate, these have always been strictly limited by both legal and fiscal considerations. Such exceptions include a reduced rate of VAT, subject to certain conditions, for residential renovations, such as building services and materials, and the installation in residential accommodation of various environmentally friendly home improvement materials, such as insulation and draught stripping. Going further would come at a cost to the Exchequer. For example, expanding the existing reduced rate to include all residential repairs and renovations is estimated to cost £3.75 billion per year, and must be viewed in the context of over £50 billion of requests for relief from VAT received since the EU referendum. Any loss in tax revenue would have to be balanced by a reduction in public spending, increased borrowing or increased taxation elsewhere. However, the Government has set out ambitious plans to make the UK a leader in clean energy to help achieve net zero targets. At the Summer Economic Update, the Chancellor announced four new schemes to support the decarbonisation of buildings. The Government is also supporting the industry by providing an additional £300 million in 2021/22 for local authorities to use to tackle draughty and poorly insulated homes. It will mean, in total, £1.3 billion will be spent on improving energy efficiency in 2021/22 through the schemes, after the successful delivery of £1.2 billion this year. The Government is committed to supporting building decarbonisation, as evidenced by the scale of this investment, other funding mechanisms such as the Energy Companies Obligation (‘ECO’), and the non-spending steps to be outlined in the forthcoming Heat and Buildings Strategy. 36. To support the accelerated uptake of ultra-low emission cars in the UK, further tax incentives should be introduced to make these vehicles more affordable. Where current environmental taxes, such as Air Passenger Duty, are blunt in their effect, the Chancellor should consider fine-tuning them to reward and incentivise investment in cleaner, more efficient, low-emission technology. (Paragraph 227 of the EAC report) Transport is the largest emitting sector, responsible for 27% of all greenhouse gas emissions in the UK, and road transport accounts for the majority of these emissions. The Government therefore uses the tax system to encourage the uptake of vehicles with low carbon dioxide emissions to help meet out legally binding climate change targets. Zero emission cars and electric vans have no Vehicle Excise Duty liability, and users of zero and ultra-low emission cars will continue to benefit from favourable company car tax rates compared to conventionally fuelled vehicles until 2024–25. The Government has also been applying a nil-rate of tax to zero-emission vans within the van benefit charge from April 2021, to incentivise the uptake of zero emission vans. The Government keeps all of these taxes under review and has to balance environmental objectives with simplicity and fairness within taxes, whilst ensuring the sustainability of the public finances over the longer term. Once the economic recovery is secured, the Government will take the necessary ste