How tax can stimulate green investment to compete internationally
Key takeaways
- Green innovation credit: Boost green R&D with an investment tax credit.
- Lower corporation tax rate: Encourage commercialisation by offering a reduced tax rate for profits from green technology development.
- Green super-deduction: stimulate green capital expenditure with a powerful capital allowance.
The UK must unlock its green growth potential to tackle climate change and supercharge the economy. The green economy offers unrivalled opportunities to meet our commitment to decarbonise by 2050 and to capture green growth that could deliver a GDP boost of up to £57bn annually by 2030.
Yet, the UK risks falling behind global competition. Both the US and Europe have introduced impressive reform packages (US Inflation Reduction Act and the EU Net Zero Industry Act) to incentivise green investment, using tax credits, subsidies, grants and loans.
Our recommendations
As part of these reform packages, other countries are being ambitious with how they use tax policy to support green investment. The UK’s approach to green taxation on the other hand has so far been piecemeal, with no clear strategic link to net zero goals.
So, we’re proposing several recommendations to strategically target important green technologies, sending a strong signal to business that the UK has a green plan and is ready to invest.
- A new green innovation credit for green technologies and processes: Introduce a new tax credit with a headline rate of 40% to unlock private sector R&D and innovation in carbon capture, utilisation and storage technologies (CCUS), electric vehicles and battery technology, heat pump technology, biofuels and hydrogen production.
- Lower corporation tax rate for profits derived from green technologies: Reduce the rate from 25% to 10% on profits derived from development, manufacture and sale of batteries required for use in electric vehicles, and commercialisation and sale of heat pumps, biofuels, low carbon hydrogen and associated storage and transportation facilities, and CCUS to incentivise commercialisation of these technologies.
- Enhanced green super-deduction rate: Introduce a capital allowance rate of at least 120% to support investment in electric vehicles and battery manufacture, grid improvements, low carbon power, heat pumps and retrofitting, biofuel refining and refuelling, infrastructure for deployment of hydrogen, and CCUS adoption by heavy industry.
