Green tax incentives offer businesses a valuable opportunity to save money while reducing their environmental impact. Businesses embracing green tax incentives today are better equipped to meet future regulatory demands, turning sustainability into a competitive advantage.
This guide breaks down the UK and EU tax reliefs, rebates, and schemes, offering practical advice to help businesses save money and adopt sustainable practices.
What Are Green Taxes and Incentives?
Green taxes penalise businesses for environmentally harmful practices, such as excessive waste or high energy consumption. For example, the Landfill Tax charges companies per tonne of waste sent to landfills, making recycling a cost-saving alternative.
In contrast, green tax incentives reward businesses for adopting sustainable practices. These can include tax reliefs for:
- Investments in energy-efficient equipment
- Renewable energy installations
- Environmentally friendly innovations
For example, companies that install solar panels may qualify for enhanced capital allowances, reducing their taxable income.
Understanding these measures can help your business avoid unnecessary penalties and unlock cost-saving opportunities.
For example, a manufacturing firm investing £20,000 in energy-efficient machinery could reduce its corporate tax liability by £5,000 in the first year through enhanced capital allowances.
Green Taxes vs Green Tax Incentives
Green Taxes | Green Tax Incentives |
---|---|
Penalise wasteful or polluting activities | Reward sustainable investments |
Increase costs (e.g., Landfill Tax) | Reduce tax burdens (e.g., capital allowances) |
Quick Tip: Conduct an environmental audit to identify your business’s biggest environmental impacts – waste, energy use or emissions. Identify specific areas for improvement.
Key Green Taxes in the UK (and How to Avoid or Minimise Them)
Green taxes are designed to discourage businesses from practices that harm the environment.
Here’s a breakdown of the major green taxes in the UK, their penalties, and actionable strategies to reduce or avoid them.
1. Landfill Tax
Penalty: Charged per tonne of waste sent to landfills, with rates as high as £102.10 per tonne for standard waste.
Solution: Reduce costs by diverting waste to recycling, reuse programs, or alternative solutions like energy recovery.
For example, a construction could avoid £25,000 in landfill tax over a year by introducing a recycling programme for site waste. They could partner with local recycling facilities and implement on-site segregation for materials like wood, metal and concrete.
How to Avoid or Minimise Landfill Tax:
- Audit your waste streams and identify recyclable or reusable materials.
- Partner with local recycling facilities that can process your waste.
- Educate staff on proper waste segregation to maximise recycling efforts.
Get up-to-date information about the Landfill Tax on gov.uk here.
2. Plastic Packaging Tax
Penalty: Applies to plastic packaging containing less than 30% recycled material, charged at £210.82 per tonne.
Solution: Increase recycled content in packaging or switch to sustainable alternatives like biodegradable materials.
For example, an e-commerce company could avoid £10,000 annually in plastic packaging taxes by redesigning its packaging. They could switch to materials made with 50% recycled plastic and eliminate unnecessary layers of shrink wrap.
How to Avoid or Minimise Plastic Packaging Tax:
- Collaborate with suppliers to source packaging materials that meet or exceed the 30% recycled content threshold.
- Simplify packaging design to minimise the use of plastic layers to reduce taxable weight.
- Explore alternatives, like biodegradable or paper-based options, that avoid the tax altogether.
Get up-to-date information about the Plastic Packaging Tax on gov. uk.
3. Climate Change Levy (CCL)
Penalty: Businesses using non-renewable energy sources face additional charges on their energy bills.
Solution: Reduced rates are available for businesses in Climate Change Agreements (CCAs) or those generating renewable energy onsite.
For example, a manufacturing business could reduce its CCL charges by 90% by joining a CCA and transitioning 40% of its energy supply to wind and solar power.
How to Avoid or Minimise the CCL:
- Switch to renewable energy providers.
- Join a Climate Change Agreement (check eligibility with your trade association).
- Invest in on-site renewables like solar panels or wind turbines to reduce reliance on non-renewable sources.
Get up-to-date information about the Climate Change Levy on gov.uk.
Green Taxes and How to Mitigate Them
Tax | Scope | Penalty | How to Mitigate or Avoid It |
Landfill Tax | Waste disposed of in landfills | Up to £102.10 per tonne (standard rate) | Reduce landfill waste by recycling or reusing materials. Partner with local recycling facilities. |
Plastic Packaging Tax | Plastic packaging with <30% recycled content | £210.82 per tonne | Use packaging with 30%+ recycled content or switch to biodegradable materials. |
Climate Change Levy (CCL) | Energy supplied to non-domestic users | Additional charge on energy bills | Use renewable energy suppliers or join Climate Change Agreements (up to 90% discount). |
Aggregates Levy | Commercial exploitation of rock, sand, and gravel | £2.10 per tonne | Use recycled aggregates or alternative materials to reduce taxable volumes. |
Carbon Price Support (CPS) | Fossil fuels used in electricity generation | Higher costs for fossil fuel consumption | Invest in renewable energy systems onsite to reduce fossil fuel reliance. |
Vehicle Excise Duty (VED) | Vehicles based on CO₂ emissions | Higher rates for high-emission vehicles | Transition to electric or low-emission vehicles; install charging infrastructure. |
Emissions Trading System (ETS) | Greenhouse gas emissions in specific sectors | Cost of purchasing additional allowances | Reduce emissions with energy-efficient processes or sell unused allowances. |
Air Passenger Duty (APD) | Passenger flights from UK airports | Varies by destination and travel class | Optimise routes, improve aircraft fuel efficiency or increase seat occupancy. |
Fuel Duty | Fuel used in vehicles and machinery | Tax per litre of fuel consumed | Train drivers in fuel-efficient practices or switch to alternative fuels like electricity or biodiesel. |
HMRC keeps an up-to-date list of all environmental taxes, reliefs and schemes for businesses: https://www.gov.uk/green-taxes-and-reliefs
Green Tax Incentives and Rebates in the UK
Green tax incentives reward businesses for adopting environmentally friendly practices, reducing costs while promoting sustainability.
Here is a comprehensive list of incentives available in the UK, along with their eligibility criteria:
1. Capital Allowances for Energy-Efficient Investments
What It Covers:
Tax deductions for energy-efficient equipment, such as LED lighting, energy-saving boilers and renewable energy installations.
Example:
If a manufacturing company invested £100,000 in solar panels, it could claim up to £25,000 annually in tax relief under capital allowances.
Eligibility Criteria:
- Equipment must be listed on the Energy Technology List (ETL).
- Assets must be used solely for business operations and not for personal use.
- The business must claim within the specified accounting period to qualify for deductions.
Get up-to-date information about capital allowances of energy-efficient items on gov.uk.
2. Research and Development (R&D) Tax Credits
What It Covers:
Tax credits for businesses developing innovative sustainable technologies or processes.
Example:
A software company developing a carbon-tracking app for businesses could claim 33% of its £50,000 development costs as a tax credit, reducing its tax bill by £16,500.
Eligibility Criteria:
- Activities must aim to improve energy efficiency or reduce emissions through new or improved technology.
- Qualifying costs may include staff wages, materials and certain overheads.
- Different criteria exist for SMEs and large companies, with varying relief rates.
- Claims must be submitted within two years from the end of the accounting period in which the R&D activity took place.
Get up-to-date information about R&D tax credits on gov.uk.
3. First-Year Allowances (FYA) for Electric Vehicles
What It Covers:
100% tax deduction in the first year for electric cars or charging points.
Example:
If a logistics company purchased an electric fleet for £500,000, it could deduct the entire cost from its taxable profits in the first year, reducing its corporation tax bill by £95,000.
Eligibility Criteria:
- Vehicles must be fully electric or ultra-low emission, meeting the government’s emission standards.
- Charging equipment must meet government standards for eligible installations.
- Assets must be used for business purposes – personal use vehicles are not eligible.
Get up-to-date information about FYAs on gov.uk.
4. Land Remediation Relief (LRR)
What It Covers:
150% tax relief for costs incurred in cleaning up contaminated land.
Example:
A property developer spending £200,000 on decontaminating a former industrial site could claim a tax deduction of £300,000, reducing its taxable profits significantly.
Eligibility Criteria:
- The land must be classified as contaminated as per HMRC definitions (e.g., due to previous industrial use).
- Relief covers costs for surveying, clean-up and remediation of contaminated land.
- Businesses must be redeveloping land for future business use, not residential purposes.
Get up-to-date information about LRRs on gov.uk.
5. Business Rates Relief for Renewable Energy Projects
What It Covers:
Reductions on business rates for businesses installing renewable energy solutions such as solar panels or wind turbines.
Example:
If a warehouse installed solar panels valued at £100,000, it could receive a 20% reduction in business rates, saving approximately £5,000 annually.
Eligibility Criteria:
- Property must meet local council criteria for renewable energy installations.
- Businesses must apply through their local council, which may have varying rates and availability depending on the location.
- Installation must be certified and comply with regulatory standards.
Get up-to-date information about business rate relief for renewable energy projects on gov.uk.
6. Smart Export Guarantee (SEG)
What It Covers:
Payments for businesses generating renewable electricity and exporting it back to the grid.
Example:
A farm installing wind turbines that generate 100,000 kWh annually could receive payments of up to £5,000 per year from an SEG-licensed electricity supplier.
Eligibility Criteria:
- Renewable energy must be generated using solar panels, wind turbines, or other renewable systems.
- Systems must be installed and certified under the Microgeneration Certification Scheme (MCS) or an equivalent.
- Must register with an SEG-licensed electricity supplier to be eligible for payments.
Get up-to-date information about the SEG on gov.uk.
7. Boiler Upgrade Scheme (BUS)
What It Covers:
Grants for smaller non-domestic properties to install renewable heating systems like heat pumps or biomass boilers.
Example:
If a rural business installed a heat pump costing £15,000, it could receive a £5,000 grant under the scheme, reducing upfront costs by a third.
Eligibility Criteria:
- Property must be non-domestic and based in England or Wales.
- This includes farms, small businesses, and community buildings. Large industrial or commercial properties are not eligible.
- Only certain types of renewable heating systems are covered, such as heat pumps and biomass boilers.
Get up-to-date information about the BUS on gov.uk.
The examples provided are illustrative and based on general government guidelines. Eligibility for tax incentives depends on factors such as business size, sector, investment type, timing and compliance with specific criteria. Speak with one of our accountants or refer to official resources to confirm exact savings and eligibility for your business.
Incentive | What It Covers | Who For | Eligibility Criteria |
Capital Allowances | Tax relief for energy-efficient equipment (e.g., LED lighting, boilers, solar panels) by deducting a percentage of the investment from taxable profits. | Businesses investing in energy-efficient technology | Equipment must be listed on the Energy Technology List (ETL). Assets must be used in business operations. |
R&D Tax Credits | Tax credits for innovation in sustainable technologies or processes, including staff wages, prototypes, and materials. | Companies conducting qualifying R&D activities | Activities must aim to improve energy efficiency or reduce emissions. Claims must be filed within two years of the accounting period. |
First-Year Allowances (FYA) | Full tax deduction in the first year for electric vehicles or charging infrastructure, reducing corporation tax liability. | Businesses transitioning to electric fleets or installing charging points | Vehicles must be fully electric or ultra-low emission. Charging points must meet government standards. |
Land Remediation Relief | 150% tax relief on costs incurred in cleaning up contaminated land for reuse in business operations. | Property developers and businesses redeveloping contaminated sites | Land must be classified as contaminated, and costs must relate to surveys, clean-up, and remediation work. |
Business Rates Relief | Reductions in business rates for properties with renewable energy installations, such as solar panels or wind turbines. | Businesses with qualifying renewable energy solutions | Property must meet local council criteria. Applications must be submitted to the relevant local authority. |
Smart Export Guarantee (SEG) | Payments for exporting renewable electricity (e.g., from solar panels or wind turbines) to the grid. | Businesses generating and exporting renewable electricity | Must register with an SEG-licensed electricity supplier. Systems must meet installation and certification requirements. |
Boiler Upgrade Scheme (BUS) | Grants for installing renewable heating systems (e.g., heat pumps, biomass boilers) in small non-domestic properties. | Small businesses, farms, and community buildings | Property must be non-domestic and located in England or Wales. |
How Do Green Taxes and Incentives Benefit Businesses?
Green tax incentives present real, tangible benefits to businesses willing to embrace sustainability.
Here’s how these incentives can make a difference:
1. Cost Savings
- Green incentives offer significant cost reductions by lowering tax liabilities or providing direct financial support.
- By investing in energy-efficient technology or renewable energy, businesses can claim capital allowances or enhanced tax deductions, ultimately reducing corporation tax. It will also reduce energy bills in the long term.
Quick Tip: Conduct an energy audit to identify areas for cost-effective upgrades that might qualify for tax incentives, such as replacing lighting with LED fixtures.
2. Compliance with Regulations
- Investing in green initiatives helps businesses stay ahead of regulatory demands increasingly focusing on sustainability.
- Taxes such as the Climate Change Levy (CCL) and Landfill Tax impose significant costs on businesses that continue environmentally harmful practices. Taking advantage of green tax reliefs means reducing exposure to these charges.
- Governments worldwide, including in the UK and EU, are tightening regulations regarding emissions and waste. Businesses investing in renewable solutions now are positioning themselves to meet upcoming regulations more easily.
- A report from EY advises that the future success of a business is now more than ever based on embracing and reporting sustainability practices.
- MSN reported in March 2024 that 4 out of 10 large businesses face hefty fines for greenwashing in 2024, as the Competitions and Markets Authority (CMA) and the EU crackdown.
Quick Tip: Review your compliance status with existing green taxes and identify areas where adopting renewable practices could help mitigate future penalties.
3. Brand Enhancement and Competitive Advantage
- Sustainability efforts are increasingly important for brand reputation, especially with consumers and investors prioritising eco-conscious companies.
- Adopting renewable energy sources or implementing waste reduction strategies signals a commitment to sustainability, boosting brand perception among stakeholders.
- A strong environmental track record can make a business more attractive to investors looking for ESG (Environmental, Social, Governance) compliance. Consumers, too, are choosing brands that demonstrate corporate responsibility.
- PWC produced a report on reputation management in the era of ESG.
Quick Tip: Develop a marketing campaign to communicate your green initiatives and attract customers who value sustainability.
How is the EU Handling Green Tax Policies?
The European Union has implemented comprehensive policies to promote environmental sustainability, leveraging green taxation as a key mechanism.
These policies focus on encouraging businesses to reduce carbon emissions, adopt renewable energy and minimise environmental impact.
1. Carbon Pricing and Emissions Trading
EU Emissions Trading System (EU ETS)
The EU operates one of the world’s largest carbon pricing mechanisms. Under this cap-and-trade scheme, businesses must purchase allowances for their carbon emissions, which places a financial incentive on reducing emissions.
Learn more about the EU ETS here.
Carbon Border Adjustment Mechanism (CBAM)
The EU has also introduced CBAM, which aims to prevent “carbon leakage” by placing a carbon price on imports from countries with less stringent environmental regulations. This mechanism helps level the playing field for EU businesses committed to sustainability.
Learn more about the EU’s CBAM here.
Consideration point:
The UK has implemented its own Emissions Trading Scheme (UK ETS), which largely mirrors the EU ETS but has different emissions caps and allowance rules. The UK’s ETS aims to align with its ambitious carbon neutrality targets but allows for tailored regulations to better suit domestic industries.
2. Renewable Energy Initiatives
Renewable Energy Directive
The EU has set ambitious targets for renewable energy adoption across member states. Businesses in sectors such as energy production, construction and manufacturing are encouraged to align with these goals by investing in renewable energy sources.
Learn more about the EU’s Renewable Energy Directive here.
Incentives for Clean Energy Transition
Various funding programs, including the European Regional Development Fund (ERDF) and the Recovery and Resilience Facility (RRF), are in place to support businesses transitioning to renewable energy solutions.
Consideration point:
The UK has introduced similar targets under its own frameworks, such as Contracts for Difference (CfD) and the Green Gas Support Scheme (GGSS). These initiatives aim to support renewable energy projects domestically, though the scope and funding mechanisms differ slightly from those of the EU.
3. Tax Incentives for Sustainable Investments
Environmental Tax Rebates
The EU encourages member states to provide rebates for sustainable investments, such as installing renewable energy systems, adopting energy-efficient technologies or developing sustainable products. These incentives are intended to reduce the financial burden of transitioning to greener operations.
Learn more about EU environmental tax subsidies here.
Consideration point:
The UK offers similar relief through capital allowances and incentives like the Boiler Upgrade Scheme (BUS) and First-Year Allowances (FYA) for electric vehicles. However, the eligibility criteria and scope of relief can vary. For example, while both regions incentivise energy efficiency, UK policies have more direct ties to corporate tax relief, whereas EU policies often rely on member state-specific rebates.
Do These Policies Apply to My Business?
If your business operates across the UK and the EU, or you’re looking to expand into the EU, understanding the EU’s green tax landscape is crucial. These policies could mean additional compliance requirements or opportunities for incentives, depending on your operations.
Quick Tip: Evaluate your business’s EU footprint to identify which green taxation policies or incentives may apply.
Our tax accountants understand both UK and EU regulations and can help you develop a comprehensive UK-EU tax incentive strategy. Get in touch today to see how we can help.
You may be interested in reading:
8 Best Countries to Start a Business in Europe
Branch vs Subsidiary – Which Is Best for European Expansion?
Practical Steps to Maximise Green Tax Reliefs
To fully benefit from green tax reliefs, businesses need a strategic approach.
Here are some practical steps to help your business identify opportunities, claim incentives and maximise savings.
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Conduct an Eligibility Assessment
Conduct an environmental audit of your business operations to identify areas where you may be eligible for green tax reliefs. This includes assessing energy use, waste management, and existing infrastructure.
Quick Tip: Involve relevant departments, such as finance, operations and facilities management, to gather comprehensive data for the audit.
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Invest Strategically in Green Technologies
Prioritise investing in green technologies that not only qualify for tax relief but also provide long-term sustainability benefits. These may include solar energy systems, wind turbines, electric vehicles and renewable heating solutions.
For instance, installing solar panels could result in a £50,000 investment, but over time, a business could benefit from tax deductions, reduced energy bills and improved corporate social responsibility.
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Work with Tax Professionals
Green tax relief schemes can be complex, with different criteria, deadlines and documentation requirements. Consulting experts, such as our accountants at J. Dauman & Co, ensures that your claims are accurate and optimised.
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Turn to Available Government Resources
Use government tools, such as the Energy Technology List (ETL), to identify eligible assets for capital allowances. The HMRC website provides updated information on green taxes and reliefs, making it easier for businesses to stay informed.
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Track and Document Everything
Maintain comprehensive records of all green investments, including invoices, receipts and energy consumption data. Accurate documentation not only simplifies the claim process but also provides evidence in case of audits.
It’s also wise to keep track of deadlines for submitting claims to avoid missing opportunities for tax relief.
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Set Sustainability Goals
Set specific, measurable sustainability goals, such as reducing carbon emissions by 30% over five years. Aligning these goals with investments in green technologies will help ensure that your sustainability initiatives are purposeful and financially rewarding.
Quick Tip: Link your sustainability goals to your eligibility for green tax incentives, helping build a clear strategy for both environmental and financial benefits.
Begin leveraging green tax incentives for your business
Explore the full potential of green tax reliefs by consulting with experts who understand the intricacies of these incentives.
Contact J. Dauman & Co today to find out which green tax relief opportunities your business could be eligible for. Learn more about our corporation tax services here.