Greening VAT

Public back reform of VAT rules that hamper climate action, says report

Katie Hill - Editor-in-Chief, My Green Pod

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Published: 21 August 2021

This Article was Written by: Katie Hill - My Green Pod

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People in the UK strongly favour using the tax system to drive a green economy, with greening VAT the most popular choice to emerge from a citizens’ jury carried out for Green Alliance by BritainThinks, and following on from an earlier survey.

The findings suggest the UK should capitalise on its new-found freedom from EU VAT rules by better aligning the tax system with its increasingly ambitious environmental targets.

At the moment, the tax regime often does the opposite, encouraging a range of environmentally damaging behaviours which run counter to the urgent need to cut carbon.  

Environmental perversities

Currently, the VAT system includes environmental perversities such as a zero rate on new builds and a standard 20% rate on renovation.

This discourages energy efficiency improvements, especially as energy-saving materials can also incur full VAT.

It also incentivises the demolition of buildings before the end of their useful lives, which squanders the carbon and material that went into their construction.

Meanwhile, the 20% VAT on fixing a product, such as a smartphone or washing machine, contributes to making repair almost as expensive as buying new in some cases. 

Green tax

In a new report outlining the results of the research, Green Alliance shows people want these perversities addressed to help them make environmentally sound decisions.

The research involved both a quantitative survey representing the public and a jury of 18 people from across the country.

VAT reform was considered along with other tax changes to benefit the environment; while all were thought to have merit, greening VAT was considered the simplest and easiest to understand.

‘People want to do the right thing to protect the environment from catastrophic climate change, but too often struggle to know what to do. Greening VAT would be an easy first step towards creating a financial system that encourages everyone to live greener and save money doing it.

‘From helping people to afford energy efficiency measures to cutting the cost of getting your smartphone fixed, this popular, fair and simple change to VAT would help the public to do their bit.’

LIBBY PEAKE
Head of resource policy at Green Alliance

One jury member from North West England said: ‘It is the best type of green tax in that it already exists and can be easily applied by government.’ Another, from Wales, said: ‘I love it. I just think it’s the best one out of all of them.’

The public want to play their role in avoiding catastrophic climate change, but at the moment struggle to know what they can do. Jurors felt that greening VAT could provide more clarity about which products were best for the environment and send a strong signal about the UK’s long-term commitment to a green economy.

A sustainable economy

Powerful measures that could be quickly implemented by the Treasury in the upcoming budget include zero-rating VAT on all repair, renovation and refurbishment services, as well as green energy products, like solar panels, heat pumps and insulation.

Previously, EU VAT rules would have restricted what the UK could have done in some of these areas, so the change offers an early opportunity to capitalise on the sovereignty of EU exit for a Brexit dividend that benefits both people and planet.
 
The jury also wanted tax reforms to form part of a more ambitious and coherent approach to tackling the nature and climate crises, and for government to highlight the wider benefits of the transition to a sustainable economy – like improved health and wellbeing.

But they cautioned that any changes made should be designed carefully so as not to harm those on lower incomes, especially if changes are made in relation to food and energy.

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