What are the tax implications of the Net Zero Review?

The Mission Zero review, recently published by the UK Government, examined whether or not existing policies would be sufficient to meet Net Zero carbon emissions by 2050. It considers the policies that should be enacted to increase the likelihood the target will be met.  This article sets out our analysis of these recommendations.

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Jayne Harrold, Dale Cambridge-Sharpe, Martin Dye, Toby Chick, Colette Henshaw, Alex Wilson, Sunil Parmar
Published: 28 Feb 2023 Updated: 10 Mar 2023
Business tax ESG Tax Budget


The review makes 129 recommendations around the three levers available to the Government to meet the Net Zero target: regulation, tax and spending.

These recommendations focus on six pillars:

  1. securing Net Zero: A framework for a sustainable industrial strategy to deliver growth and jobs during the transition;
  2. powering Net Zero: a gear shift in delivery to achieve targets, recommending specific actions to unblock the pipeline and including a re-think of energy infrastructure. It proposes a solar revolution and onshore wind revolution;
  3. Net Zero and the economy: Going further to capture the economic opportunities across sectors, for businesses of all sizes;
  4. Net Zero and the community: unlocking local action by reforming the relationship between local and central Government, making sure the planning system supports Net Zero and encouraging community energy and action; and
  5. the future of Net Zero: global opportunities from new technology and R&D innovation from now to 2050. It also looks at the UK’s carbon pricing regime and how the UK can maintain its international leadership on climate.

The focus of this article is on the tax recommendations, and it is likely the UK Government will publish their initial response to these at the Budget on 15 March 2023.

The review clearly states the need for long-term certainty in order to encourage business investment, and this includes a long-term road map for tax rates.  It highlights how the introduction of the landfill tax escalator, which increased tax rates on a pre-announced set trajectory from 2007 to 2014, encouraged investment in recycling facilities.

The review reflects concerns expressed by the CBI that the UK is falling behind international competitors in the race to provide the goods and services needed to deliver Net Zero.  In particular, it highlights the significant tax incentives introduced in the US via the Inflation Reduction Act (IRA), in Germany via the Climate and Transformation Fund, in France via the “France 2030” investment plan and in Canada in response to the IRA.

Capital Allowances

The first tax recommendation is to conduct a review of the effectiveness of tax policy to incentivise investment in decarbonisation, including through capital allowances, by Autumn 2023.  This follows on from the recent Treasury consultation into capital allowances and what should replace the 130% Super Deduction (“SD”), that applies to companies' investment expenditure incurred between 1 April 2021 and 31 March 2023.  The responses to this were due to be published in the Autumn of 2022, so it is likely to be included in the Budget.

As noted in the review, businesses have welcomed the super-deduction, with more than half of firms (53%) planning to claim the SD.  With the Department for Energy Security and Net Zero (previously known as BEIS) estimating that c.£20 billion of investment is required to achieve all energy efficiency potential in non-domestic buildings, however, many would welcome a more narrow focus on delivering Net Zero.

A theme picked up in the review, which is consistent with what our clients tell us, is that business would like to see enhanced capital allowances such as the SD linked to a reduction in the energy use of a building and carbon footprint. This could be linked to existing building regulations or Energy Performance Certificates (EPCs); or via an extension of the review’s Net Zero Performance Certificates (NZPC) to non-domestic properties.

Another point noted in the review and echoed by our clients is the potential for the introduction of tax credits for capital investment to help lower the initial high costs of investment in clean technologies.  This has already happened in the US, for example small businesses can receive a tax credit that covers 30% of the cost of switching to low-cost solar power.

Stamp Duty Land Tax

Commenting on ways in which innovative green finance can be used to help support improvements in household energy efficiency, the review notes that Stamp Duty Land Tax is one of the levers that could be used to help drive change:

“The Review has also heard calls for an energy-adjusted Stamp Duty Land Tax, which would encourage owners to improve the energy performance of their homes, boosting the energy efficiency retrofit market. The Green Finance Institute argue that this would also help to encourage lenders to develop green finance solutions. Stamp Duty (Land Tax) applies only to property purchases over £250,000 but increasing house prices have put more homes within this bracket.”

The Treasury is currently focused on other reforms to the SDLT regime, and in particular the outcome of the recent mixed use consultation is expected to be published soon.  Therefore, whilst the SDLT regime could be used as a way to encourage energy efficiency, it seems unlikely that there will be any immediate additional changes to SDLT legislation in this regard.

Business Rates

The review notes that business rates exemptions have already been introduced for eligible green plant and machinery such as solar panels, wind turbines and battery storage used with renewables and electric vehicle charging points, as well as 100% relief for low carbon heat networks that have their own rates bill.  It goes on to recommend:

“The Government should continually assess the existing business rates incentives to ensure there are no further inadvertent disincentives for businesses to invest in net zero technologies.  For example, up to 50% of business investment is potentially subject to business rates.  HMT should consider the balance between increasing business rates and the use of business rates in supporting business growth and decarbonisation.”

Short term incentives through business rates relief can encourage short term investment.  However ultimately on expiration and a future revaluation cycle this investment will be considered an improvement which increases the rent a hypothetical tenant would make, leading to a longer-term increase in the cost of their business rates tax.  We would therefore recommend the Government extends the scope of green reliefs to encourage further investment, and extends the duration beyond 2035.


In relation to the charging of electric vehicles, the review notes the cost differential between private and public charging and recommends the equalisation of VAT on public (20%) and private (5%) electric vehicle charging in 2024:

Prices at typical on-street charge points can be around two to three times higher than home electricity. Currently, home chargers command just 5% VAT, while VAT for public chargers is set at 20%. FairCharge have led a call for the government to cut VAT on public chargers, backed by 23 companies. The Review recommends that VAT on public and private electric vehicle charging be balanced.”

We would welcome VAT equalisation to 5% as it would further incentivise the transition to electric car use, particularly for lower income drivers.

As part of the review of green finance support for home energy efficiency measures, the review notes:

Tax and subsidy policy can act in tandem to turbocharge the transition. Government has already cut VAT on energy efficiency measures, heat pumps and solar panels to zero, for the next five years.  This is helping to reduce costs and incentivise homeowners to make changes to their properties, and we recommend this should be maintained permanently.”

In our opinion, the existing relief is unnecessarily narrow; for example, insulated roofing material is non-qualifying (see Greenspace Ltd v HMRC) and subject to 20% VAT.  We consider that the Government should extend the relief to all energy efficient improvement works, thereby further reducing household energy use and stimulating the building and construction industry.

The review noted that VAT can also have a part to play in helping to promote the circular economy:

Repairing products should be affordable. Often it is cheaper to buy a replacement product rather than to repair an existing one.  The Review has heard calls for VAT on repairs to be cut for individuals.  The Aldersgate Group, for example, has argued “a priority tax reform should be to zero-rate VAT on all repairs.”

In our opinion, standard rate VAT combined with high labour costs discourages consumers repairing products, thereby incentivising the purchase of new products.  Zero rating all repairs would complement eco-design reforms on repairability and we would welcome this.  The Government could go further by adjusting VAT rates on maintenance and regeneration of buildings, thereby aligning the treatment to that of new builds.  This would reduce unnecessary demolition of existing buildings and reduce emissions from construction.


The review majors on incentivising Research and Development (R&D) and suggests a review by the Autumn focusing on how to incentivise greater R&D for Net Zero delivery, particularly by further clarifying research priorities, reviewing Government support through tax credits, increasing ring-fencing of R&D spending, and introducing enabling regulations. A specific recommendation is for up to three new R&D demonstrator projects by 2035 as part of an overarching R&D technology roadmap.

Currently, much of the innovation and research in Net Zero technologies are at low technology readiness levels. With increased investment, this will help technologies become more viable at a commercial scale. R&D tax credits were identified as a way to incentivise investment in Net Zero R&D, especially for small and medium enterprises (SMEs).  However, the Government reduced the benefit from R&D tax credit from 24.7% (profit making) and 33.3% (loss making) down to 21.5% (profit making) and 18.6% (loss making) for SMEs in the Autumn Statement, which is a direct contradiction to this review.  While we understand there are other reasons to reduce the net benefit for SMEs, doing so could result in reduced investment in Net Zero technologies.  In order to ensure this doesn’t happen, the Government will need to make up the short fall of funding for companies looking to invest in Net Zero R&D. One way this can be achieved is increasing the R&D tax credit net benefit rate for companies investing in developing Net Zero technologies. Alternatively, the Government can make more grants available and make the application process easier and simpler to help give companies the assurance funding is available and accessible.

Carbon leakage and carbon markets

The review examines the issue of carbon leakage (economic activity relocating to other jurisdictions with lower environmental taxes and/or regulation) and recommends a consultation on mitigating measures with an aim of introducing effective policies from 2026.  The UK Government is already facing pressure from Parliament to act on this issue, particularly given the imminent introduction of an EU Carbon Border Adjustment Mechanism (CBAM) that would at first require reporting of emissions generated from the production of energy intensive products (e.g. steel) for imports into the EU from countries deemed to have lower taxes on carbon emissions.  The UK Government promised parliament in May last year that it would launch a consultation on a UK CBAM.  Announcement of a CBAM consultation at Budget is likely.

Finally, carbon markets feature in the report as a tool to meet Net Zero emissions.  The review recommends the UK Government sets a pathway for the UK Emissions Trading Scheme (UK ETS) until 2040 that sets out a vision on design and operation, a timetable for expanding UK ETS to the whole UK economy and addresses inclusion of Greenhouse Gas Removals (technology that removes greenhouse gases from the atmosphere for permanent storage in geological formations).  If implemented this would provide business with the certainty they need to invest.  We would therefore welcome a review as soon as possible.

Approval code: NTAJ14022314

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.