Written evidence submitted by the Chartered
Institute of Taxation
BACKGROUND
1. The Chartered Institute of Taxation (CIOT)
welcomes the opportunity to comment on the environmental impact
of Budget 2011 and green taxes.
2. The call for evidence sets out seven themes.
We set out our comments in relation to each of these below.
3. As a professional body concerned with taxation,
we have limited our comments to tax issues. In this submission,
references to environmental taxes or green taxes refer not only
to specific taxes that have an environmental objective, such as
landfill tax, but also to tax measures contained in other taxes
that have similar objectives, eg the taxation of private use of
vehicles by reference to emissions.
4. We have already submitted a paper dealing
with the principles of environmental taxes to HM Treasury, which
can be found on the CIOT website at http://tinyurl.com/6cfsu7x.
This submission draws on that paper.
EXECUTIVE SUMMARY
5. The CIOT believes that green taxes can play
a significant role in a modern tax system, and in furthering the
Government's green objectives, but it is important that they are
implemented with close attention to sound principles to ensure
they are effective. Taxes which merely shift pollution elsewhere,
or which leave loopholes which can be exploited, or which fail
to lead to greener behaviour because of a lack of alternatives,
are failing to do their job. Put simply, green taxes should ideally
be easy to avoid (by a change in behaviour) but hard to evade.
6. The UK already has a complex tax system and
lengthy tax code which constitute a substantial bureaucratic burden
for taxpayers, particularly small businesses. It is important
that environmental tax measures do not unduly add to that burden.
We would prefer to see environmental tax policy:
— Build
environmental incentives into existing taxes where possible rather
than creating new taxes;
— Implemented
through measures that are transparent, uncomplicated and easily
understood by the taxpayer without the need for expert advice;
and
— Look
at means to broaden the tax base, eg the proposal to extend air
passenger duty to aircraft not currently within its scope.
7. Environmental taxes should conform to Adam
Smith's four basic principles of taxation: Fairness, Certainty,
Convenience and Minimising the Compliance Burden.
8. For environmental tax incentives to be fully
effective, it is important that government gives people confidence
that they will be in place for a long period. The Government
should put in place an Environmental Tax Framework for the rest
of the Parliament along the lines of the Business Tax Framework
already adopted.
EXTENT TO
WHICH BUDGET
2011 FURTHERS THE
GOVERNMENT'S
GREEN OBJECTIVES
9. The CIOT sees the key relevant objectives
as being:
— Cutting
carbon emissions and decarbonising the economy;
— Increasing
the proportion of tax revenue accounted for by environmental taxes;
— Increasing
the target for energy from renewable sources; and
— Supporting
the creation of new green jobs and technologies.
10. The main Budget announcements with a "green"
impact are:
— Changes
to the structure of climate change levy (CCL) by the introduction
of a carbon price floor from 2013;
— A cut
in fuel duty;
— Changes
in the rates of the aggregates levy (deferred to 2012), climate
change levy and landfill tax;
— Temporary
suspension of CCL reliefs pending state aid re-approval;
— Deferral
of an increase in air passenger duty and announcement of the intention
to tax flights on personal planes;
— A technical
change to aggregates levy to deal with a problem arising from
ongoing litigation;
— Changes
to company car tax to incentivise use of low emissions vehicles;
— Extension
of Climate Change Agreements to 2023 and an increase in the CCL
discount for participants from 2013;
— Commitment
to fund four Carbon Capture and Storage (CCS) demonstration plants
from general taxation rather than a CCS levy; and
— Commitment
to a Green Investment Bank.
11. Of these only the first two are projected
to have a significant impact in terms of government revenue.
12. The green objective which the CIOT is best
qualified to comment on is the Government's target to increase
the proportion of tax revenue accounted for by environmental taxes.
The red book indicates that the net effect of environmental tax
measures announced in the Budget will be a small cut in cash terms
in the 2011-12 and 2012-13 financial years followed by a significant
increase in 2013-14 and subsequent years. However, if changes
to fuel duty are included in the definition of environmental taxes,
the effect of Budget policy decisions is a cut in environmental
tax revenue for every year covered by the Budget projections.
13. This highlights the need for consistency
from the Government over what constitutes an environmental tax.
A parliamentary written answer from the Economic Secretary in
July 2010 (Hansard, column 545, 12 July 2010) included only landfill
tax, aggregates levy, climate change levy and EU Emissions Trading
Scheme revenues in a list of environmental taxes. However, the
previous month, the ONS's Environmental Accounts 2010 also included
fuel duty, VAT on duty, renewable energy obligations, vehicle
excise duty and air passenger duty in its definition. Air passenger
duty appears under the environmental tax subheading in the "Budget
policy decisions" table in this year's Budget red book (table
2.1, page 42-3) but fuel duty appears separately. We would welcome
greater clarity in this area.
14. The Finance Bill introduces legislation that
had been foreshadowed in a consultation on the carbon price support
mechanism (CPSM). In our response to that consultation, we raised
a number of concerns including:
— The
CPSM may raise concerns about double taxation;
— There
are issues relating to its interaction with the EU Emissions Trading
Scheme; and
— The
CPSM does not apply to imported electricity and the availability
of cheaper imported electricity could then undermine the purpose
of the scheme.
Our concerns about the CPSM remain.
15. We consider the environmental measures in
the Budget to be relatively limited in scale. We do not have
a problem with this—it is for Government to determine the
speed and extent to which it wishes to move on its green objectives.
However, we think that there would be greater commitment to green
objectives if a consolidated tax plan was developed providing
a better guide as to how the Government proposes use the tax system
to achieve its green objectives (see paragraph 30).
16. On specific measures, it is difficult to
determine the extent to which taxation rather than any other
factor is responsible for behavioural changes and the extent to
which other instruments such as regulation have had an impact.
However there has been a considerable reduction in the quantity
of material being sent to landfill and it seems highly probable
that the substantial increases in landfill tax have been the major
causal factor behind this.
APPROACHES TO
SHIFTING THE
BURDEN OF
TAXATION AND
FACTORS TO
CONSIDER WHEN
DESIGNING AND
INTRODUCING GREEN
TAXES
17. The normal principles of good taxation can
and should be applied to all environmental tax measures. A good
starting point is the four principles set out by Adam Smith in
"The Wealth of Nations". These are:
— Fairness;
— Certainty;
— Convenience;
and
— Minimising
the compliance burden.
FAIRNESS
18. The Government and CIOT share the objective
of a tax system which is fair and which is seen to be fair. At
a household level, taxes based on consumption—as most environmental
taxes are - tend to take a greater share of the income of those
on low incomes than of those on high incomes (ie they are regressive).
Consequently environmental tax measures are particularly at risk
of being judged to be unfair and disproportionate in their effects.
This typically leads to protests and calls for exemptions and
concessions. (The furore around the introduction of VAT on fuel
in the 1990s is a case in point.) It is important to recognise
and respond to these legitimate concerns. However, rather than
introducing exemptions or exclusions, diluting the effect of the
measure and complicating the tax system further, we generally
favour offering assistance to targeted groups via mechanisms outside
the tax system. This means less well-off households too, get
the opportunity to make small gains by adopting greener behaviour.
19. The Government should pay particular attention
to the affordability of public transport for people on low incomes.
20. Green taxes have the potential to give foreign
suppliers an advantage over British business if they are not subject
to similar measures. We understand the frustration of some businesses
that see the burden of taxation substituting imported environmental
damage for existing local damage. We do not want to see the shifting
of "dirty industries" outside the UK to the detriment
of UK businesses subject to stricter controls. So far as possible,
therefore, measures should apply equally to both local and overseas
production.
21. There are limitations on what can be done
because of EU and other international law. However some taxes
lend themselves to dealing with such problems. Excise duties
apply equally to both local and imported goods and services and
can therefore serve as a means of ensuring a level playing field
for business. There is also a need to re-examine international
agreements that prevent taxes being used as an instrument of environmental
policy.
22. One further issue around the fairness of
green tax measures is the potential for double taxation. For
example, it would be possible to "green" both business
rates and council tax but in doing so there may be an element
of double taxation because these taxes already include an element
of the cost of other taxes. Another situation that could give
rise to double taxation would be if country A levied a tax on
energy used in production of manufactured goods while country
B levied a tax at point of sale or import based on an estimate
of energy used in production. Without compensatory measures an
exporter from country A to country B would be taxed twice while
a firm exporting the other way would not be taxed at all.
CERTAINTY
23. Taxpayers—businesses in particular—benefit
greatly from certainty. They want to be able to carry out transactions
with confidence, knowing that risks are confined to features inherent
in markets and natural phenomena. It therefore needs to be clear
to a taxpayer in advance what the tax consequence of their actions
will be. The main elements of a tax system that provide certainty
are simplicity, transparency, adherence to the rule of law and
long-termism. It is unfortunate to note that the Budget had to
introduce measures that may suspend certain existing reliefs from
the climate change levy for an indeterminate time pending renewal
of state aid approval. This can only lead to confusion and uncertainty
for those businesses involved.
24. The tax system is already over-complex and
the tax code lengthy. If a tax is complex, it will not be understood—or
may be understood in more than one way—and will give rise
to uncertainty and efforts to circumvent it. The Government is
rightly committed to tax simplification. It is difficult to build
environmental incentives into the system without adding some administrative
burdens and additional clauses to the tax code, but it should
be a priority to minimise this.
25. We believe that the two main methods that
could be employed to create a greener tax system without unduly
complicating the overall system and imposing more burdens on taxpayers
are:
— By
incorporating green measures in existing mainstream taxes where
possible rather than creating new taxes; and
— Widening
the scope of existing tax regimes, eg excise style duties, to
achieve green objectives.
26. Both of these have already been done. For
example, in relation to motor vehicles, there are income tax,
VAT and vehicle excise duty measures that are based on green objectives.
27. Transparency is also important. Taxpayers
need to be able to understand what the environmental tax seeks
to achieve, how it is levied, how much it costs and what behaviour
is needed to avoid paying it. Many of the taxes in this area
are not transparent; for example most businesses are not aware
of how much CCL they pay because it is a component of energy prices
and not captured by most accounting systems. Transparency about
tax changes is also important in avoiding environmental taxes
being labelled "stealth taxes".
28. A third factor contributing to certainty
in the tax system is adherence to the rule of law, as laid down
in statute. Codified tax law is preferable to tax law determined
only by guidance or case law. In particular, retrospective change
is damaging to confidence in the tax system and sends a bad signal
to those outside the UK about the stability of the UK tax system.
Accordingly, we welcome the Government's Protocol on unscheduled
announcement of changes to tax law, published on Budget day, which
explicitly recognises that retrospective changes to tax legislation
will be wholly exceptional.
29. Long-termism in government policy is especially
valuable if the intention is to change people's behaviour in ways
that require significant investment of time or money. The fact
that the last Government were able to announce substantial increases
in landfill tax some years in advance has undoubtedly been helpful
in encouraging waste producers to invest in measures to increase
recycling rates and avoid some waste generation.
30. The new Government has deservedly won praise
for the introduction of the Corporate Tax Road Map, which sets
out how the Government intends to approach reform of the corporate
tax system over the course of this Parliament. The CIOT would
like to see the introduction of a similar framework for green
taxes—a Green Tax Road Map.
CONVENIENCE
31. Taxes should be levied at a time and in such
a manner that it is most convenient for the taxpayer to pay the
tax. We are not aware of any obvious instances of environmental
taxes not complying with this principle.
MINIMISING THE
COMPLIANCE BURDEN
32. One risk with the move towards green taxes
is that there will be more taxes - each with its own compliance
regime and potentially able to generate penalties for non-compliance.
As set out in paragraph 25, where possible legislators should
look to the adaptation of existing taxes and use of existing regimes
such as that for excise duty rather than the creation of new ones.
OTHER FACTORS
FOR CONSIDERATION
33. It is important for the Government to be
clear what success looks like for each environmental tax measure.
While green taxes can and do raise significant tax revenues,
unlike most other taxes their objectives include either or both
of altering people's behaviour and ensuring that the cost of damaging
behaviour is borne by those responsible (the "polluter pays"
principle). An environmental tax that raised no money at all
could be an enormous success, simply because it has driven out
the behaviour it was targeting. (The plastic bag tax in Ireland
is perhaps the nearest to achieving this result.) Thus Government
needs to be clear for each measure of the extent to which the
environmental objective or the revenue-raising objective is paramount.
34. Where the purpose of a tax is to change behaviour
there must be realistic alternatives available. For example,
if a Government's objective in raising fuel duty is to shift people
onto public transport this will be ineffective—and arguably
unfair—if there are wide areas where no public transport
alternative exists.
35. Environmental taxes present a particular
political challenge. While in theory they have the potential
to be a rare popular tax (and in the abstract are often favoured
over other forms of taxation), in practice they tend to be particularly
unpopular. This is partly because they are, in the case of fuel
and flight taxes at least, penalising people for doing something
they value highly, for enjoyment or because it is essential to
their livelihood. It is also because they are perceived as unfair
(see paragraphs 18-22) and because many people believe politicians
are not being honest about their motives for introducing them
(claiming it is high-minded action against climate change when
they see it as just revenue raising).
36. The CIOT recognises the difficulties inherent
in hypothecation of tax revenue (especially where the size of
the revenue stream is uncertain) but notes that both (a) making
green tax increases fiscally neutral by balancing them with visible
cuts elsewhere, and (b) earmarking revenues from green taxes for
particular related spending, have the potential to mitigate public
opposition to green taxes to some degree, and should be carefully
considered by the Government. (These two courses are, of course,
mutually exclusive for a single revenue stream.) Additionally
compensatory measures (see paragraph 18) can tackle the perception
of unfairness and focusing on areas where there are genuine alternatives
(see paragraph 34) is also likely to help.
A SHIFT TO
GREENER TRANSPORT
37. We have not examined this issue in detail
but our instinctive view is that if the taxation is set at a high
enough level, then such a behavioural shift may well result.
However there are a number of potential problems which may arise.
38. Businesses or individuals that have older
forms of transport and have no means of avoiding the tax by altering
their behaviour could be unfairly penalised. There may be damage
to UK competitiveness. Taxes can lead to rogue traders dumping
waste and other products such as old motor vehicles, though these
problems are well known and best solved by other legislation.
39. In some areas transport taxes can be vulnerable
to merely displacing environmental damage rather than reducing
it. For example, an airport tax introduced at Schipol in the
Netherlands reduced the number of people travelling from the airport,
but increased the number of commuters between the Netherlands
and Belgium and increased air traffic in Belgium, thus increasing
emissions overall.
40. Accordingly, in our view, any attempt to
use taxes to achieve such a shift needs to be planned and implemented
over a period of years and may need to be accompanied by other
measures. For example, if tax is used to discourage the retention
of old vehicles or aircraft it would be desirable to provide a
transitional measure to help those affected to dispose of those
items.
41. It is also clear that unless and until there
is a ready availability of low carbon alternatives—such
as access to affordable public transport in rural areas—so
that there is a real alternative, such taxes will have a limited
effect as a deterrent but a powerful effect as an agitator.
THE SCOPE
FOR THE
TAXATION SYSTEM
TO PROTECT
AND INCREASE
STOCKS OF
NATURAL CAPITAL
42. The CIOT believes that there is considerable
scope for the tax system to be used to deter the use of scarce
and finite natural resources (land in particular) as well as reducing
emissions of carbon and other contributors to climate change.
43. The UK already uses the tax system to encourage
efficient land-use. The landfill tax has been successful in reducing
the amount of material being sent to landfill, which consequently
reduces the amount of land needed for this purpose. More directly
the taxation system rewards efforts to reclaim contaminated land
through enhanced allowances (land remediation relief). These
incentives work well and could potentially be built on.
44. The 2010 Mirrlees Review of the tax system
looked at the potential for a land value tax (that is, a levy
on the unimproved value of land, rather than property value).
While recognising that reform of the planning system would probably
have greater influence over land available for particular uses
than the tax system, the Mirrlees Review concluded there is a
strong case for introducing a land value tax, with priority to
be given to considering its use in the context of land used for
non-domestic purposes as a replacement for business rates (see
http://www.ifs.org.uk/mirrleesreview/design/ch16.pdf).
The introduction of such a tax—either for all land, or
just for that used for non-domestic purposes—would clearly
present a substantial practical challenge (potentially including
the valuing of all plots of land within the UK separate from any
structure on the land). Should the Government be minded to move
in this direction—and the CIOT does not take a position
on what we see as a political question—the first step would
sensibly be a feasibility study of the kind recommended by Mirrlees.
45. Notwithstanding the apparent success of landfill
tax, we believe that tax can be used more aggressively to ensure
that the real cost of consuming natural resources is reflected
in consumer products and the tax so raised is used at least in
part to develop technologies to restore what was lost.
46. At present, environmental tax policy seems
focused on low carbon objectives. We take the view that a more
holistic approach is necessary.
IMPACT OF
THE TAXATION
SYSTEM ON
SUSTAINABLE DEVELOPMENT
47. We see the three key responsibilities of
the tax system in this respect as being:
— To
underpin a strong, sustainable, internationally competitive economy,
that delivers growth and prosperity and does not unduly deter
investment, hard work or other beneficial economic activity;
— To
sustainably fund the services, infrastructure and social security
needed for a strong, fair and inclusive society and economy; and
— To
play a part in incentivising and rewarding environmentally responsible
actions.
48. Getting the right balance in the tax system
is fundamental to achieving the first two of these, and can be
highly significant in the third.
IMPACT OF
POLICY PROPOSALS
IN "THE
PLAN FOR
GROWTH"
49. A key objective stated in the Plan is to
create the most competitive tax system in the G20. The CIOT and
others in the tax world have said for a long time that the corporate
tax system needs serious reform and modernisation to be internationally
competitive. It is good to see that the Government agree and that
reform is going ahead with a sense of urgency. We are particularly
supportive of the benchmark of a simpler, more certain tax system.
The benefits of this for environmental sustainability are set
out in paragraphs 23-30 of this submission.
50. Another key objective of the Plan is to increase
investment in low carbon technologies. A key policy proposal
to achieve this is the introduction of a carbon price floor.
Our views on this are as set out in paragraph 14 of this submission.
51. The Plan notes:
"The Stern Review made clear that the costs
of effective international action to tackle climate change are
dwarfed by the costs of inaction."
We agree that there is a need for international action.
Action includes the need to review international treaties to
ensure that a balance can be achieved between the prevention of
the use of the tax system to give local businesses a competitive
advantage and the need to be able to introduce and apply effective
environmental tax measures that do not put domestic businesses
a disadvantage to foreign businesses.
52. We note the formation of the Green Economy
Council. Further, we note that with the exception of the TUC
all of the members appear to be from industry (including bodies
representing industry). Some of those members are from businesses
that are particularly high energy users. While we note that the
Council is specifically formed to discuss how government and industry
can work together on green objectives, it is important that there
is similar consultation with those most directly affected by green
policies—consumers, including those on lower incomes who
will be least able to pay higher energy bills.
GREEN INVESTMENT
BANK
53. We have no comments on the Green Investment
Bank.
THE CHARTERED
INSTITUTE OF
TAXATION
54. The Chartered Institute of Taxation (CIOT)
is a charity and the leading professional body in the United Kingdom
concerned solely with taxation. The CIOT's primary purpose is
to promote education and study of the administration and practice
of taxation. One of the key aims is to achieve a better, more
efficient, tax system for all affected by it—taxpayers,
advisers and the authorities.
55. The CIOT's comments and recommendations on
tax issues are made solely in order to achieve its primary purpose:
it is politically neutral in its work. The CIOT will seek to
draw on its members' experience in private practice, Government,
commerce and industry and academia to argue and explain how public
policy objectives (to the extent that these are clearly stated
or can be discerned) can most effectively be achieved.
56. The CIOT's
15,400 members have the practising title of "Chartered Tax
Adviser" and the designatory letters "CTA".
20 April 2011
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