Your sustainability has far-reaching consequences both for the ecosystem and the success of your company. To this end, the UK government and HMRC are providing tax relief incentives to businesses which adopt more sustainable practices.

Tax relief for sustainable businesses-the focus of our article-isn't the only reason to go eco-friendly though. There are now an increasing number of legal frameworks governing a business's impact on the environment, including the EU's Corporate Sustainability Reporting Directive [1] (CSRD) and the UK's Sustainable Disclosure Regulation [2] (SDR), both of which require certain organizations to keep transparent records of their environmental impact and work toward greener goals.

Moreover, research suggests that the general public-your customers and clients-are increasingly concerned with the sustainability of the brands they engage with. 84% of customers in one survey stated they would feel alienated from any brand which exhibited poor environmental practices [3], whilst over half of the respondents agreed they'd willingly pay more for eco-friendly products.

Making your business sustainable [3] is about more than aiding the environment, it's also about securing your company's future. Read on to discover the tax relief options available to you, to help make your green transition financially sustainable, as well as environmentally.

What is tax relief?

Tax relief is what we call it when the government's tax authority-in the UK this is His Majesty's Revenue & Customs (HMRC)-allows businesses or individuals to pay a lower rate of tax, usually as an incentive toward some common goal.

In the context of sustainability, various tax relief rates and exemptions are available to incentivise a transition toward a greener economy, with the ultimate goal being to bring England, Scotland, Wales and N. Ireland in line with global climate goals-such as those set out in the Paris Climate Agreement [4] of 2016.

Note: Tax relief for sustainable businesses may be presented as a lower percentage of the full tax rate normally due or, in some cases, as a complete exemption from tax.

What tax relief incentives are available for sustainable businesses in the UK?

It's worth noting that tax relief isn't the only tool used by the UK government to incentivise your sustainability. There are also disincentives and penalties in place to dissuade UK companies from continuing business as usual. In other words, HMRC has put both carrots and sticks in place to aid the country's green transition.

First off, we'll take a look at the tax relief incentives available for businesses both big and small which invest in environmental sustainability.

Climate Change Levy (CCL) and Climate Change Agreements (CCAs)

A levy is a type of obligatory payment or tax which the government can enforce to meet certain ends, like during wartime for example (or in situations of international climate crisis!). the Climate Change Levy (CCL) is an additional tax which most UK businesses must pay on the non-renewable energies they use.

For sustainable businesses, however, there are tax relief incentives and exemptions available. Businesses which use small amounts of energy, or which are supplied renewable energies, for example, are exempt from paying the CCL, as are domestic energy users and non-commercial charities.

Tax relief rates on CCL are available to certain energy intensive businesses provided that they enter into a monitored Climate Change Agreement (CCA) with the government's Environment Agency.

Below is a table detailing the evolution of CCL tax rates across different energy commodities, and the tax relief available for CCA holders. Tax rates are shown in pence per kilowatt hour (p/kWh) and pence per kilogram (p/kg).

Type of energy	April 2021 rate	April 2022 rate	April 2023 rate	April 2024 rate	April 2025 rate	Tax relief (discount) for CCA holders
Electricity	0.81 p/kWh	0.78 p/kWh	0.78 p/kWh	0.78 p/kWh	0.78 p/kWh	92%
Gas	0.41 p/kWh	0.47 p/kWh	0.57 p/kWh	0.67 p/kWh	0.78 p/kWh	89%
Liquified petroleum gas (LPG)	2.18 p/kg	2.18 p/kg	2.18 p/kg	2.18 p/kg	2.18 p/kg	77%
Coal and other solid fossil fuels	3.17 p/kg	3.64 p/kg	4.45 p/kg	5.26 p/kg	6.06 p/kg	89%

To qualify for a CCA, you must agree to and meet binding sustainability targets which are reviewed every two years.

Capital allowances on energy-efficient items

Another tax relief for sustainable businesses comes in the form of ‘enhanced capital allowances' for energy-efficient items. This incentive is arguably one of the most cost-effective for UK businesses looking to go green and can be especially helpful for those just starting out-since the tax relief makes it much more financially viable for smaller organisations to invest in ESG (Environment, Social and Governance).

According to HMRC [5], you can claim 100% tax-free capital allowances for the following (provided they're new and unused):

• Electric cars and zero-emission cars
• Zero-emission goods vehicles
• Equipment for electric vehicle charging points
• Plant and machinery for gas refuelling stations, e.g., storage tanks for gas, biogas and hydrogen

Should purchases fall under any of the categories listed above, you can deduct their full cost from your profits before year-end tax is applied.

Tax relief on electric company cars and vehicles

If your business provides company cars to its employees, it's worth considering an investment in electric and zero-emission vehicles in future, since these are eligible for 100% capital allowance tax relief.

Green relief for green energy producers and users

A little more specific, yet equally interesting for those UK businesses it applies to, is the incentive of green relief for business rates-available in England until 31^st March 2035. Business investments in plant and machinery used for onsite production and storage of renewable energy (e.g., solar panels, heat pumps, battery storage and wind turbines) may, under this scheme, be awarded full exemption from business rates.

R&D tax relief

Similar to business rate tax exemption for green investments is the tax relief available for businesses in sustainable R&D. Tax relief is available to businesses investing in the research and development of new and/or improved sustainable technologies, energies and products.

Other environmental incentives and tax relief schemes for sustainable businesses

Before we move on to discussing the disincentives in place, to stop UK businesses polluting, it's worth noting that there are a wider variety of other local tax relief incentives, grants and schemes available for sustainable businesses.

Depending on your industry, sector, and location, it could be worth checking out what environmental incentives are available to you locally.

For example, some local councils have their own region-specific eco incentives in place, whilst DEFRA (The Department for Environment, Food & Rural Affairs) and the National Lottery Heritage Fund offer a range of tax relief incentives and funding schemes to business projects involved in wildlife conservation, biodiversity and waste management.

What about disincentives, penalties and eco-taxes?

Compliance with sustainability directives and environmental goals can be hard, but it can also be extremely costly to ignore. In addition to the tax incentives offered to sustainable UK businesses, HMRC has put various eco-taxes in place to actively penalise those organisations which do not start taking steps toward sustainability.

Landfill Tax

Sustainability and recycling go hand-in-hand, just as it does with waste management. Getting rid of your waste in landfill sites is really bad for the environment and so is penalised by HMRC with the Landfill Tax.

Any business which disposes of its waste in landfills, rather than recycling it or seeking to minimize the waste they generate, must pay £103.70 per tonne as Landfill Tax.

On the flipside, businesses which send waste from landfill sites to be recycled, incinerated or reused may be able to claim tax credits-another form of tax relief for sustainable brands.

Aggregates Levy

Similar to the Landfill Tax is the Aggregates Levy, which seeks to reduce the amount of sand, gravel, and rock being dredged from UK seas, imported from abroad, or dug up from UK ground-i.e., to minimise businesses impact on the UK's eco-system. All aggregate imports and production which are not used in certain agricultural or industrial processes are levied at £2.03 per tonne.

Plastic Packaging Tax

Lastly, there is a tax on plastic packaging in place to encourage UK businesses to reduce the amounts of (unrecycled) plastic they use. The Plastic Packaging Tax charges businesses £217.85 per tonne of plastic packaging which contains less than 30% recycled plastics and which is either:

• Single-use (used just once by the consumer), or
• Used in transporting goods from manufacturer to consumer

Conclusion: The time for change is now

As the UK moves to protect the health and future of our planet, its tax authority HMRC has put in place a number of tax relief incentives and eco-tax penalties to encourage companies to become more environmentally friendly.

As a result, sustainable businesses and sustainable business practices may enjoy greatly reduced tax rates, increased capital allowances, and even complete exemption from certain eco-levies and business rates.

For the future of your business, as well as for the world, it is imperative that UK organisations start committing themselves to sustainability.

To aid in your transition to a greener future, consider seeking the advice of professional corporate tax advisors [6], trained to ensure your ESG compliance and save your business money.