On Wednesday 17 March the Chancellor presented his eighth Budget. With regard to protecting the environment, its stated intention was to use "a range of economic instruments to address the challenges posed by sustainable development, to tackle local environmental threats and to control and reduce emissions of the gases responsible for climate change and poor air quality".
1. Energy
The next steps in the government's strategy on the climate change levy were revealed in the 2004 Budget. These included a freeze in the rates of the levy and new eligibility criteria for entering climate change agreements (CCAs), a move welcomed by the CBI and a number of energy-intensive sectors that had not qualified under existing criteria. The new criteria should increase the number of businesses that can participate in CCAs, and therefore benefit from an 80 per cent discount to the levy in return for implementing energy-saving measures.
The provisions announced in the Budget mean that as well as allowing businesses currently eligible for CCAs to remain eligible, any business with energy costs of more than 12 per cent of turnover would also be allowed to apply for a CCA. In addition, any business with energy costs greater than 3 per cent could be eligible provided that it can demonstrate it is suffering as a result of international competition. However, any extension of the CCA scheme will require EU State Aid approval before it can commence.
The Budget also contained a package of measures to promote household energy-efficiency. These include a reduced rate of VAT for installing ground-source heat pumps from 1 June 2004. Measures to encourage the private rented sector to invest in energy efficiency were also outlined. Individual private landlords will be eligible for up-front relief on capital expenditure up to a value of £1,500 for energy saving installations such as loft and cavity wall insulation. Support for micro combined heat and power (CHP) units in the form of a reduced rate of VAT is currently being evaluated and could be introduced in 2005.
Enhanced capital allowances for investments in energy-saving technologies were introduced in 2001 and currently cover more than 6,000 approved products. It is now intended to expand this to a further product ranges, with details due to be announced during summer 2004.
2. Waste
The standard rate of landfill tax will be increased from £14 per tonne to £15 per tonne on 1 April 2004. The rate of tax applying to landfilled inactive or inert wastes (listed in the Landfill Tax (Qualifying Material) Order 1996) remains unchanged at £2 per tonne. The Government announced in 2002 that the standard rate of landfill tax will be increased by £3 per tonne in 2005-06, and by at least that amount in the years thereafter, until it reaches a rate of £35 per tonne.
The maximum credit claimable by landfill site operators against their annual landfill tax liability under the Landfill Tax Credit Scheme has been increased. The maximum credit of that liability will be increased from 6.5 to 6.8 per cent from 1 April 2004, the start of the new landfill tax contribution year. Operators whose accounting period covers time before and after 1 April will need to apportion their maximum percentage credit so that it reflects the different entitlements.
There are new record-keeping requirements for operators of landfill sites in Northern Ireland. Since 1 October 2002, waste transfer notes have had to be preserved for two years. From 1 May 2004, as is currently the position for Great Britain, waste transfer notes will have to be kept for six years, unless a shorter period has been agreed with Customs.
Although not widely reported, the Budget Statement suggests that the Government will defer the landfill allowance trading scheme, introduced to help the UK meet the reductions in landfill required under the Landfill Directive, until 2006. It would place a cap on the amount of waste that local authorities could send to landfill, and allow those authorities not utilising their full allowance to sell their unused allowance to those authorities exceeding their cap. Delaying the scheme would disadvantage councils with good recycling records.
3. Vehicle fuel
Fuel duty rates will rise from 1 September 2004. Duty rates for sulphur free fuels, i.e. petrol and diesel with a sulphur level not exceeding 10mg/kg, will be increased in line with inflation by 1.4 pence per litre. In order to encourage the early introduction of sulphur-free fuels, the duty for ultra-low sulphur fuels will be set at 0.5 pence above this level and will increase by 1.9 pence per litre from the same date. A 2002 EU Directive requires that all petrol and diesel sold in the EU from January 2009 contain no more than 10mg/kg sulphur. The Government hopes that this duty incentive will ensure that sulphur-free fuels are generally available from January 2005, without the need for any regulations. However, the Department for Transport will assess the availability of sulphur-free fuel in 2005 and consider whether further measures are necessary.
The duty on rebated gas oil (red diesel) and fuel oil will be increased by 2.4 pence per litre, which will reduce the differential between rebated oils and the main road fuels by 1 penny per litre. The rationale behind this move was to "underpin the strategic approach to tackling oils fraud".
There will now be a three-year period of certainty for duty rates on low carbon alternative fuels such as biofuels and road fuel gases, providing a 20 pence per litre duty differential in favour of bioethanol and biodiesel, guaranteed until at least 2007. Possible further measures to encourage the market for biofuels were also included in the Budget. According to the government, sales of biodiesel have increased from almost nothing to around 2 million litres per month since the introduction of a duty incentive in July 2002. HM Customs and Excise is to consult with stakeholders in summer 2004 on using input-based taxation for biofuels and on the application of enhanced capital allowances for plants processing the biofuels of most benefit to the environment. The outcome of this process should be announced in the Pre-Budget Report issued at the end of 2004. The Department for Transport will be consulting on the implementation of the EU Biofuels Directive shortly. This will include options on complementary regulatory measures, including a Biofuels Obligation for the transport sector.
On its support for liquefied petroleum gas (LPG), the Government stated that the necessary infrastructure was in place in the UK, with over 1400 refuelling sites, servicing over 100,000 LPG cars. Sales of road fuel gases have also grown from 4 million litres to 200 million litres per year since 2001. Although the Government acknowledges the environmental benefits to air quality of LPG, the effect of the 2004 Budget will be to increase the duty on LPG by 2.4 pence per litre in September 2004, and reduce the duty differential by 1 pence per litre for each of the next three years until 2007. However, it was stated that the government is committed to supporting the LPG industry through the duty differential, grants for vehicle conversion and reduced rates of vehicle excise duty.
4. Transport
All rates of vehicle excise duty and Air passenger duty are frozen for this year. For company car tax, the level of carbon dioxide emissions qualifying for the minimum percentage charge for a petrol car (15%) will be frozen at 140 grams per kilometre for 2006-07. The fuel benefit tax charge applies the same percentage as the company car charge against a set figure. The 2003-04 figure of £14,400 will be frozen for 2004-05.
There were however, major changes on the taxation of company vans. From 6 April 2005, personal taxation of employees who take their van home, such as when on-call, will be abolished providing there is no private use. As a transitional measure, the benefit in kind charge of £350 to £500, depending on the age of the van, will be continued for all vans where private use is unrestricted. From 6 April 2007, drivers will pay tax on £3,000, as if a vehicle was a company car for unrestricted private use. Where an employer provides fuel for unrestricted private use, an additional fuel charge of £500 will be applied. This will not apply to the self-employed.
A third progress report on the lorry road-user charging scheme to tax lorries by distance travelled was included in the Budget. This confirmed plans to introduce the charge and set out the proposed timetable and design of the scheme, but also announced that the scheme will be delayed from the original 2006 date until 2008, to allow for further technological development.
5. Water
It was announced that building on the current scheme of enhanced capital allowances for business investments in qualifying water-efficiency technologies, the Government will introduce further allowances for rainwater harvesting equipment in 2004.
The Government is currently considering introducing economic instruments to combat the adverse environmental effects of agriculture. It outlined its intention in the Budget to launch in the near future a consultation on measures to reduce levels of diffuse water pollution.
6. Aggregates
For the second consecutive year, the rate of the aggregates levy, introduced in April 2002, is frozen at £1.60 per tonne. The aim of the levy is to encourage the use of alternatives to virgin aggregate, such as wastes from construction and demolition. The Government said that there are signs that the production of virgin aggregate has decreased since the levy's introduction, and that more construction and demolition waste were being used in its place. It now says that it will continue to monitor the impact of the levy.
Details of an extension to the Northern Ireland relief scheme, due later in 2004, were also published. Although still subject to if state aid approval, it includes details on how quarry operators can obtain the relief and what they need to do to qualify.
7. Housing development
The final report of a review of housing supply was released to coincide with the Budget. The Barker review was aimed at developing greater stability, affordability and supply in the housing market by introducing reforms of central and local government and the house building industry. The report will be used by government to tackle housing shortages by making changes to the planning system and by increasing funding for affordable housing. It has promised to consider how this can be delivered both nationally and regionally taking into account the economic, social and environmental implications and ensure that development is sustainable.
In order to try to achieve this, some economic incentives were introduced in the form of a consultation document, 'Promoting more flexible investment in property', seeking views on how a new Property Investment Fund, a UK version of the US Real Estate Investment Trusts, might be structured to enhance the liquidity of property investment. The government also announced its intention to introduce a Derelict Land Tax Credit that will provide a tax incentive for the development of derelict brownfield land.
For further information please contact Mark Rutter on +44(0) 207 367 2186 or email mark.rutter@cms-cmck.com
