Introduce a lower corporation tax rate for net zero firms

The Institute of Directors is today publishing ‘The Green Incentive: how to put net zero at the heart of business planning’. The policy paper sets out four specific medium-term recommendations which would incentivise businesses, and particularly smaller businesses, to play their part in decarbonising the economy.

The Government has set a national climate change target of net zero by 2050. However, there are a lack of effective incentives and support for small and medium sized businesses to achieve net zero themselves.

Therefore, the IoD is calling on the UK Government to:

  1. Be explicit that it wants every business to achieve net zero in its operations.
  1. Introduce, with several years’ notice, a lower corporation tax rate for organisations that have achieved net zero, compared to those that have not. This recommendation does not necessarily require a greater use of taxpayer resources or, conversely, that taxes necessarily rise for other firms.  What is important is that there is a wedge between the two to act as a clear financial incentive to achieve the desired change.
  1. Develop a methodology for carbon footprint accounting, in line with the existing approach for the declaration of company profits. Limited companies would be required to keep records of, and report on, their carbon footprint and use the information to determine which corporation tax band they are eligible for.
  1. Undertake an assessment of the suitability of support available for firms to become net zero. Additional measures should be considered, such as the development of a recognised kitemark scheme for companies to signal their progress on the path to net zero, strong professional pathways for zero carbon advisers, and action to fill reporting gaps such as a requirement for applicable commercial landlords to inform SME tenants of the carbon impact of their building use.

Kitty Ussher, Chief Economist at the Institute of Directors and report author, said:

“Since the government introduced its net zero target, there has been no structured policy initiative designed to increase the number of smaller businesses taking their own action. Instead, support for SMEs to decarbonise has fundamentally relied on firms making an active decision to seek it out.

“That is not to say that SMEs do not want to play their part. Our own research shows that business leaders are keen to understand what they need to do, but there is uncertainty around the short-term business case for change, particularly given other pressing calls on their organisation’s available time and resources in the here-and-now.

“Piecemeal and sector-based initiatives can only go so far. By creating a future wedge between the corporation tax paid by those businesses that are net zero and those that are not, there would be a clear incentive for all businesses to achieve the desired change. If implemented, we believe that this simple yet significant policy change would be a huge stride towards meeting this country’s climate change target.”

The IoD’s policy paper, ‘The Green Incentive: how to put net zero at the heart of business planning’, can be downloaded here.