DIRECT DEDUCTIONS FOR GREEN EXPENSES

There are now just a few direct tax incentives to businesses which reward the use of environmentally friendly equipment. Virtually all of them relate to the use of motor vehicles and the provision of energy to power them. The incentives take the form of substantially accelerated tax relief for buying or leasing zero and low-CO₂ emitting vehicles and lower tax charges for directors and employees of businesses who use them for private travel.

 

What are the basic rules for tax deductions?

Normal tax rules apply to expenditure incurred by businesses on environmentally friendly goods and services. Most of the special tax breaks for such expenditure have expired and are now limited to zero or low emission vehicles and related plant and machinery. Tax treatment of expenditure is divided into two types - revenue or capital.

 

Revenue expenses

Revenue expenses are day-to-day costs incurred on goods or services which are consumed immediately or within a relatively short period; no more than two years. Examples of revenue costs are stock, materials, wages and other overheads.

 

Capital expenses

Capital expenses are costs of physical or intangible assets which have enduring use; usually with an expected useful life of at least two years. For example, plant and machinery (including cars), fixtures and fittings such as electrical or watersystems and patent rights.

 

Calculating tax deductions

Ultimately, a full tax deduction is allowed for all expenditure whether it’s revenue or capital. However, the timing of the tax deduction for capital expenditure is accelerated for some environmentally friendly purchases.

 

Revenue expenses

Such expenses are deductible from profits. Each pound of expenditure reduces the taxable profit or increases the loss a business makes. There are no enhancements for environmentally friendly purchases.

 

Capital expenditure

Tax deductions for such expenses are determined by special rules known as “capital allowances”. These allow a deduction each year for a percentage of the expenditure that spreads tax relief, in some cases over decades. The percentage of expenditure allowed varies between 6% and 18% per annum on the reducing balance but can be as much as 100%.

 

Tax deductions applicable to cars

Capital allowances for the purchase of cars are given at three rates:

• 6% of cost per annum where the vehicle’s CO₂ emissions exceed 50g/km
• 18% of cost per annum where CO₂ emissions are greater than zero but no more than 50g/km; and
• 100% where CO₂ emissions are zero.

 

100% deduction for other capital expenditure?

There are two circumstances where a business is entitled to a tax deduction equal to 100% of capital expenditure in the year of purchase instead of just a percentage of it. They are where the:

1. Annual investment allowance (AIA) applies (on expenditure up to £1 million). The tax break is not targeted specifically at environmentally friendly purchases. It applies to most but not all types of capital expenditure on plant and machinery. It cannot apply to the purchase or leasing of cars.
2. Expenditure is on plant or machinery that qualifies for enhanced capital allowances (ECAs), also known as first-year allowances.

Companies that incurred capital expenditure on plant or machinery (except for cars) on or before 31 March 2023 and for which they have not claimed the AIA or ECAs can claim a “super-deduction” when they come to file the corporation tax return. This is a capital allowance equal to 130% of the expense.

 

Enhanced capital allowances

The following types of plant and machinery, including some cars, qualify for ECAs. They are:

• cars with zero CO₂ emissions
• plant and machinery for gas refuelling stations, for example storage tanks and pumps
• gas, biogas and hydrogen refuelling equipment
• zero-emission goods vehicles, i.e. wholly electrically powered vehicles
• equipment for electric vehicle charging points.

Entitlement to ECAs is subject to further terms and conditions.

 

Conditions for ECAs

Qualifying conditions for ECAs vary according to the type of plant or machinery they relate to.

For cars with zero CO₂ emissions the conditions are:

• vehicles must be purchased new (not second hand) and unused
• for purchases on or after 1 April 2021 a car must be registered with an EC certificate of conformity or a UK approval certificate, showing zero CO₂ emissions; and
• expenditure must be incurred on or before 31 March 2025 for companies or 5 April 2025 for unincorporated businesses.

For gas refuelling stations the conditions are:

• plant and machinery must be solely for refuelling vehicles with natural gas or hydrogen including storage tanks, compressors, pumps, controls and meters used in connection with the refuelling of vehicles with natural gas or hydrogen, equipment for dispensing such fuel; and expenditure on biogas refuelling equipment.

Associated costs such as those for transport and installation are also eligible for ECAs for expenditure incurred by 31 March 2025.

For electric vehicle charging points the conditions are:

• the equipment must be solely for the purpose of charging an electric vehicle; and
• expenditure must be incurred on or before 31 March 2025 for companies or 5 April 2025 for unincorporated businesses.

An electric vehicle is one that is capable of being powered wholly by electricity even if it can also run on other fuels, i.e. hybrid vehicles.

For zero-emission goods vehicles the conditions are:

• the expenditure must be incurred on a vehicle designed for the carriage of goods
• expenditure must be incurred on or before 31 March 2025 for companies or 5 April 2025 for unincorporated businesses.

 

Exclusions from ECAs

The following types of business are not entitled to ECAs:

• those in financial difficulty
• those yet to repay State Aid where it is excessive, broadly where aid received is more than €85 million
• those involved in the fisheries or aquaculture sectors; and
• those that manage waste for others.

TRAVEL, CARS AND OTHER VEHICLES

Where an employer provides a director or other employee with a car which is available for private use it counts as a taxable benefit in kind. The director or employee is liable to tax each year or part year they have use of the car. The amount is calculated using the car’s new list price and a variable percentage depending on its CO₂ emissions. For hybrid cars there is an additional factor, the maximum range achievable under electric power only. This result is called the cash equivalent.

The employer is liable to Class 1A NI at 13.8% of the cash equivalent.

 

What are the tax and NI costs of providing a company car?

The percentage of list price used to work out the cash equivalent of a company car is taken from a table of rates set by the government (see Appendix A). The lower the emissions the lower the cash equivalent, tax and NI.

Zero emission cars (currently, only wholly electric powered cars meet this requirement) and some hybrid cars are considerably more tax efficient than their wholly fossil fuel powered equivalents.

Example 1

In 2023/24 Acom Ltd provides a car for private use to one of its employees. The car was bought second hand for £17,000 but its original new list price was £26,000. It produces CO₂ emissions of 98g/km. The cash equivalent is calculated as £6,240 (£26,000 x 24%).

If the employee is a higher rate (40%) taxpayer the annual tax payable for the car is £2,112 (£5,280 x 40%) and Acom’s Class 1A NI is £861 (£6,240 x 13.8%).

The cash equivalent for zero and very low CO₂ emission cars can be significantly lower than for more polluting cars. A lower cash equivalent results in lower income tax and Class 1A NI liabilities.

Example 2

Bcom Ltd purchases a new electric car which it makes available for private use to one of its employees. The car’s new list price was £26,000. The annual cash equivalent is £520.

If the employee is a higher rate (40%) taxpayer, the annual tax payable for the car is £208 (£520 x 40%) and Bcom’s Class 1A NI is £72 (£520 x 13.8%).

 

What are the tax and NI costs of providing fuel for a company car?

Where an employer provides a director or employee with fuel (other than electricity) for private mileage for use in their company car this also counts as a taxable benefit in kind. The cash equivalent for this benefit is calculated using two factors: a fixed amount set by the government each year (for the tax year 2022/23 the amount was £25,300 and for 2023/24 it’s £27,800) and the same percentage as is used to calculate the cash equivalent for the company car (see Appendix A).

The cash equivalent fuel (electricity does not count as fuel for this purpose) provided for low CO₂ emission vehicles, like that for cars, can be significantly lower than for more polluting vehicles. Again, this results in lower income tax and Class 1A NI liabilities.

Example 3

Acom Ltd, from Example 1, also provides the director with fuel for private mileage. This results in a cash equivalent of £6,672 (for the 2023/24 tax year).

If the employee is a higher rate (40%) taxpayer, the annual tax of £2,668 (£6,672 x 40%) and Acom’s Class 1A NI is £920 (£6,672 x 13.8%).

Subject to conditions there is no taxable cash equivalent where an employer provides electricity to charge a company car (or van or other goods vehicle). The tables below set out the tax and NI consequences where an employer pays for electricity for charging a vehicle.

 

Employer provides and pays for fuel for company car

Provision	Company car available for private use
Employer allows cars to be recharged from a vehicle charging point at work.	No taxable cash equivalent.
Employer pays for a vehicle charging point to be installed at the employee’s home and the electricity used.	No taxable cash equivalent.
Employer pays for charge card for unlimited access to local authority vehicle charging point.	No taxable cash equivalent.

 

 

Employee charges own car and employer meets the cost of electricity

Provision	Company car available for private use
Employer reimbursed cost of electricity used for business mileage only.	No cash equivalent. Reimbursement amount for electricity used for business mileage can be calculated using HMRC’s advisory fuel rate of 9p per mile.
Employer reimbursed cost of electricity used or private mileage.	Cost of electricity for private mileage counts as a taxable benefit. This can be calculated using HMRC’s current advisory fuel rate of 9p per mile.

 

What’s the tax position for environmental charges for motor travel?

 

Business-owned vehicle

If an employee uses a company car, van or other commercial vehicle and incurs a congestion, low emissions or other clean air zone charge while on a business journey which is paid by their employer, the cost to the business is tax deductible. Penalties and fines incurred by a driver while travelling are a liability for the business (even if the journey is a private one) because a penalty or fine relates to the owner of the vehicle and not the driver. HMRC’s view, based on case law, doesn’t allow a tax deduction for such fines.

 

Employee’s vehicle

If the employee uses their own car or van for a business journey and incurs a congestion, low emissions or other clean air zone charge the tax and NI position is:

• if the employer pays the charge it’s exempt from tax and NI for the employee and the employer is entitled to a tax deduction for the cost
• if the employee pays the charge and is not reimbursed they are entitled to claim an income tax deduction for the expense.

The tax position for penalties and fines incurred by an employee in a privately owned vehicle mirrors that for a vehicle owned by their employer. It is the vehicle owner’s liability. The effect of this is that where an employer pays the fine direct or as a reimbursement to the employee, it counts as extra salary for the employee and the employer must account for PAYE tax and NI. The employer is therefore entitled to a tax deduction for the expenses because it’s not paying a fine but is in effect paying the employee salary to cover it.

 

What are the tax breaks for using bicycles?

As a green policy the government created two tax breaks to encourage businesses to promote the use of bicycles for business travel as an environmentally friendly alternative mode of transport:

• a generous tax and NI-free mileage allowance; and
• the cycle-to-work scheme.

Both arrangements can produce tax savings.

 

Mileage allowance

If an employee uses a bicycle not owned by their employer for business journeys, the employer can pay up to 20p per mile tax and NI free. Note that journeys between an employee’s home and their permanent workplace are not qualifying business journeys.

The employer can claim a tax deduction for the allowance paid.

Where the employer pays less than the maximum mileage allowance rate the employee is entitled to a tax deduction for the difference.

Example

Chris works in the evenings delivering takeaway food for a local restaurant. He is an employee. He uses a privately owned bike for journeys between his home, the restaurant and its customers. In a typical week the restaurant pays Chris a mileage allowance on top of his wage of 10p per mile. Chris cycles 100 miles delivering food in a typical week. This means:

• the restaurant owner can claim a tax deduction for the £10 for the mileage allowance
• the £10 Chris receives is not taxable income nor is it liable to NI; and
• Chris can claim a tax deduction of £10 per week (20p approved mileage rate less the 10p per mile received from employer x 100 miles).

 

Cycle-to-work scheme

The legislation for the cycle-to-work tax break is unusually straightforward. It allows employers to provide a bicycle, with or without safety equipment, as a tax and NI-free benefit in kind. Three simple conditions must be met for a scheme to be effective:

1. The employee can’t own the bike etc.
2. The bike is used mainly for qualifying journeys. This can include normal commuting.
3. The employer offers the benefit to all its employees. Note that the tax break applies even if some employees choose not to take the benefit in kind.

Although employers can set up and operate a cycle-to-work scheme, they are widely marketed as an off-the-peg product by employee benefits specialists. While using an off-the-peg scheme is convenient it adds complication to this simple tax break.

Cycle-to-work schemes are one of the few benefits which still save tax and NI when used as part of a salary sacrifice or optional remuneration arrangement.

To set up your own cycle-to-work scheme all you need to do is offer your employees use of a bike and procure as many as you need. The bikes don’t all have to be the same value. You can give the employees a price limit, say determined by their seniority in the business, and let them choose the bike that suits them. There’s no limit on the value of bikes that you’re allowed to provide and to which the tax and NI advantages apply.

After a while the bikes can be offered for sale to the employees at a modest price or for free. If given for free it counts as a taxable benefit in kind equal to the bike’s second-hand value at the time. If instead the employee pays for the bike (at the second-hand value) there’s no taxable benefit. HMRC publishes a guide to acceptable values which are quite generous. These are 18% to 25% of cost after a one year, and just between 1% and 2% of cost after five years.

Example

Zena has used a bike provided by her company through the cycle-to-work scheme. It cost the company £600. After four years the company offers the bike to Zena to purchase. HMRC’s guidance value is 7% of cost, i.e. £36. If Zena pays this there’s no taxable benefit in kind. Alternatively if the company gave the bike to Zena free of charge she would be liable to tax on £36.

The cost of providing the bikes, their maintenance and other expenses associated with a cycle-to-work scheme are tax deductible for the employer. For the bikes capital allowances can be claimed and for the other expenses a straightforward deduction from profit is allowed. If you offer the bikes with a salary sacrifice, i.e. an employee gives up some of their salary in exchange for use of a bike, it can be made to be cost neutral by using the tax and NI savings achieved from the salary sacrifice and still be beneficial to the employees.

Providing a bike in exchange for payment, this includes a salary sacrifice by an employee, constitutes a hire agreement. A corollary of this is that if the bike costs you more than £1,000 you’ll need to obtain a credit licence from the Financial Conduct Authority unless you have one already for other reasons.

If you want to avoid the extra admin involved with obtaining a consumer credit licence, you have two options:

• where you procure the bikes and provide them direct to employees make sure they cost no more than £1,000; or
• use an employee benefits provider which has a consumer credit licence (most do these days). They’ll organise procurement of the bikes and handle the paperwork. A quick online search will give you plenty of choices. The drawback is that you’ll be charged fees for their services.

The government has published a detailed guide for employers on setting up and operating cycle-to-work schemes. It’s available at https://tinyurl.com/33pdff6w.

HMRC publishes a general guide for employers to salary sacrifice schemes. This is available at https://tinyurl.com/yw2uy8e2.

 

VAT and cycle-to-work schemes

As an employer, if you’re VAT registered and purchase a bike or cycling safety equipment for use in a cycle-to-work scheme it counts as wholly for your business despite any private use of the bike. As a result, you are entitled to reclaim any VAT paid on the purchase. However, you must account for VAT on any private use of the bikes. HMRC provides guidance about accounting for VAT in such circumstances at https://tinyurl.com/mrxt44hv.

INVESTING IN WOODLANDS AND REWILDING

The Environmental Land Management (ELM) scheme was introduced in 2022 to encourage rewilding and other land management designed to improve the environment. Payments received under the scheme are subject to tax. A secondary consequence of ELM payments is that land currently devoted to agricultural use which is rewilded or managed for non-agricultural purposes might cause the loss of inheritance tax advantages.

 

What are the tax breaks for income derived from woodlands?

Profits from selling the timber from your woodlands, whether felled or standing, are exempt from income and corporation tax. While the gap between timber harvests can be long, you can exploit the land for other uses in the meantime, e.g. running a business such as environmental awareness courses, green-field camping etc. However, the tax exemption doesn’t apply to such business profits. The normal rules for letting land or trading apply instead.

As far as profits from sales of timber are concerned personal ownership has the edge over corporate. This is because while profits made from the timber by a company are tax free, extracting the profits isn’t. Taking salary or dividends usually results in a personal income tax bill for the recipient. By contrast, profits made through personal ownership of woodlands are covered by the exemption.

 

Capital gains derived from woodlands

A large part of the value of woodlands lies in the timber. The more mature it is, i.e. close to felling when the land is sold, the greater the price of the woodlands. The increase in value attributable to the value of timber is exempt from tax whether owned personally or by a company. However, any gain that results from the sale or transfer isn’t exempt, i.e. it’s taxable subject to the general rules for capital gains. Personal ownership is preferable to corporate ownership for the same reasons as those already mentioned for profits. A further advantage is that an individual has an annual capital gains tax exemption which reduces the tax payable.

 

Inheritance tax and woodland ownership

There are a few inheritance tax (IHT) reliefs that can apply. Business property relief (BPR) eliminates IHT on the value of the woodland (land and trees) where it’s been owned for two or more years and has been run as a business. For example, timber harvesting, shooting rights, use as a leisure facility, e.g. a camping site that includes facilities, shooting rights, etc.

Where BPR doesn’t apply agricultural property relief (APR) might. This too eliminates IHT where the woodland has a direct or ancillary agricultural purpose. For example, it’s used for short rotation coppicing or as a “shelter belt” for farmland.

There’s also a relief specifically for woodlands but it’s rarely claimed as BPR or APR usually apply first. Plus, it’s only a deferral of IHT until the sale of the timber.

Last on the list of IHT breaks is heritage property relief. It applies if the woodland is of outstanding scenic, historic or scientific interest.

 

VAT on owning and managing woodlands

The sale of growing timber is subject to standard-rate VAT if the owner is registered or required to be registered for VAT. A registered person (individual, partnership, company) is entitled to reclaim VAT incurred on costs of planting and maintenance. The same applies to any ancillary trade relating to the woodlands.

If a woodland is purchased by a person not registered for VAT, who intends to derive income from it, it may be worth their registering so that they can reclaim VAT on expenses. If the only income will be from the sale of timber it might be many years before they sell it and have to account for VAT. In the meantime they can recover VAT paid on the cost of any goods and services used to manage and maintain the woodlands.

Indirect investment in woodlands can qualify for the same tax breaks as owning woodlands directly.

 

Finding woodlands to invest in

While indirect investment funds are becoming more popular there are still relatively few. Searching online for “forestry or woodlands investment funds” will put you on the right track. Alternatively, a financial advisor should be able to help.

Finding woodlands for direct ownership is easier, although direct ownership means more paperwork, hands-on management and maintenance. You can find woodlands for sale all around the UK by searching online.

 

What are the tax issues for environmental management of agricultural land?

The ELM scheme is not the first government scheme to pay farmers and other landowners to manage their land in a certain way, usually to benefit the environment. It is, however, the most recent and comprehensive. It allows different types of grant payment for different purposes. These can be a series of payments and/or a lump sum. The tax treatment of these depends on which type of payment is made.

 

ELM payments

The general rules for taxing government grants apply to ELM payments. One-off grants are paid to encourage the use of technology, equipment, and innovation with the aim of:

• improving farm productivity
• adopting innovative technology and practices
• improving the climate, environment, and animal health and welfare.

Ongoing grants are paid for:

• maintaining and improving the health of improved grassland and arable soils
• managing habitats, woodlands and flood risk
• planting trees and managing woodland
• better understanding the condition of our moorland
• restoring peatlands in the uplands and lowlands of England.

The general tax rules are that one-off grants are treated as capital and therefore not taxed as income. Instead, they are taken into account when calculating gains and losses when the land is sold as part of the farming business or by itself.

Ongoing payments are usually taxed as income when calculating the profit or loss of the farming trade.

While HMRC’s guidance has not been updated to include ELM grant payments, its existing guidance provides sufficient information to determine the tax treatment.

• Tax treatment of grants and subsidies: general principles https://tinyurl.com/3zvhfnsm
• Particular grants which may cause doubt or difficulty https://tinyurl.com/4sb4v2jf
• Timing of recognition of grants and subsidies https://tinyurl.com/mr2xnx49

 

Tax deductions for rewilding and environment land management costs

The general tax rules apply to costs incurred in managing and maintaining land. A tax deduction is allowed from income or gains where the land is directly or indirectly used in a business, e.g. farming. Expenses fall into one of three categories:

• revenue - day-to-day costs which are tax deductible from income
• capital expenditure - equipment, plant, e.g. drainage, for which a tax deduction from profits is allowed and calculated using the CAs rules
• capital expenditure - work on land or buildings which doesn’t qualify for a CAs deduction but can usually be taken into account when working out capital gains on the sale or transfer of land.

Specific information about farming and agricultural expenses is provided at https://tinyurl.com/bdwpn4h8

 

IHT relief and rewilding or other environmental land management

To appreciate the tax issues involved it’s necessary to understand IHT APR. Broadly, APR relieves the agricultural value of land in an individual’s estate from IHT by either 50% or 100% depending on whether the land is used directly by the owner or by a tenant under an agricultural lease or licence.

Where rewilding or other environmental management of land results in the cessation of its use for agricultural purposes, IHT APR may be lost. However, rewilding etc. does not automatically disqualify the agricultural value of land qualifying for APR. For example, where the land can be shown to be beneficial to a farming business generally APR should still be available.