CBI urges UK to utilise tax incentives to outsmart rather than outspend international competition

New research from the CBI recommends that the UK utilise tax incentives to outsmart rather than outspend international competition in high-growth green sectors.

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 £57 billion a year 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.

Rain Newton-Smith, CBI Chief Executive, said: “The UK is lagging behind in the global green growth race. Our US and European rivals have bolted out the gate with incentivising reform packages, securing major market share and creating skilled jobs.”

“Making better use of the tax system in the form of capital allowances, investment tax credits and reductions to the corporation tax rate, to incentivise green investment is an effective way to drive the supply of new green products and services and encourage the adoption of green technology.”

“We want to see government act by taking some of the steps recommended in this report and implementing more when fiscal headroom allows given challenging economic conditions. These tax reforms are only part of a wider, cohesive package alongside clear government support and wider decarbonisation policy, ideally in the form of a Net Zero Investment Plan.”

The CBI is proposing a number of 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.

1. 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.

2. 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.

3. Enhanced green super-deduction rate.

Introduce a capital allowance rate of at least 120% to support capital 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.

Jonathan Dunn, Head of Climate, Anglo American, said: “Effective tax policy can be an integral part of a government’s approach to addressing climate change, by incentivising investment and innovation in the goods and services we need for a low carbon future and by discouraging harmful environmental practice.”

“The UK has a strong history of fostering innovation, and there are some great opportunities to build on the strong tax and regulatory systems and unlock the investment needed to underpin the UK contributions to a low carbon future. We welcome the CBI’s contribution to the policy discussion on this critical issue.”

Find out more here.