The Government’s initiatives on energy efficiency and climate change are now at complete odds with the property tax system writes Robert Hayton
Today Boris Johnson set out a vision of the economy post COVID with a green energy pledge promising to “Build Back Better”.
Johnson told the Conservative party virtual conference that “we must build back better by becoming more competitive in both tax and in regulation.” He is, of course, right. The Chancellor can deliver upon that pledge by providing clear and sustained tax incentives to help reach net zero by 2050.
The classes of plant and machinery that are included within business rates bills were last redefined in 1993 through the Wood Committee and are now wholly inconsistent with the Government’s initiatives on energy efficiency and climate change.
Investment in renewable energy to produce heat or power from solar technologies, biomass, biofuels, fuel cells, photovoltaics, wind, water (including waves and tides, but excluding production from the pumped storage of water) and geothermal systems should not translate into higher business rates bills like it does now.
Driving change through turning commercial properties green or eco-friendly, requires investment. Where businesses reduce their carbon footprint it should be considered to be for the benefit of the ‘planet’ not the public purse. It simply makes no sense to penalise financially, through higher rates bills, for lowering emissions.
Business rates can also increase significantly if older buildings are brought up to the standard of modern equivalents. The build costs are high, and rates rise accordingly. By incentivising older buildings to be greener by incorporating high energy systems such as high-efficiency interior lighting, HVAC or hot water systems, or efficient building envelopes for example we can speed up the reduction in our CO2 emissions further.
Supply and demand, which varies across the country, and from sector to sector, will ultimately determine how much extra rent can be derived having an energy efficient building compared to one that is not. Landlords will have to look at the return on investment and, with leases getting shorter, it is not clear Landlords will always benefit from an exercise of refurbishing buildings to simply enhance the energy efficiency in isolation.
By making new and existing premises carbon neutral or even positive needs to be incentivised. A carbon offset multiplier, a discounted standard rate of tax if you like, to reduce property taxes that are paid, could be the catalyst for real change.
We need to ensure that the Treasury’s “fundamental review” isn’t a smokescreen for ‘keep it all the same’. Incentivising, rather than penalising, investments which benefit the wider environment and climate change goals cannot be overlooked any longer.
Robert Hayton is Head of Property Tax at the real estate adviser Altus Group