New Energy Tax Is Bad News For UK's Smaller Companies

Jason Gorringe, Tax-news.com, London

04 April 2001

Governments will try and tax just about everything, given the chance, and this week in the UK businesses had to face up to a new tax burden - the Climate Change Levy (CCL), a tax on energy use which will add between 10 and 20 per cent to the cost of electricity and gas for some commercial users. Small and medium-size companies will be hardest hit under the CCL, and there is a genuine fear that some may have to reduce their number of staff or may even go out of business as a direct result of the tax.

The CCL came into force on Sunday 1 April 2001, but it's been a long time in the pipeline. The UK government has consistently stressed that all sectors of the economy must play their part in meeting UK greenhouse gas emissions targets and in March 1998 the Chancellor asked Lord Marshall to produce a report on economic instruments and the business use of energy. Lord Marshall reported back in November 1998, and recommended that there probably was a role for a tax if businesses of all sizes and from all sectors are to contribute to improved energy efficiency and help meet the UK's emissions targets.

The March 1999 budget subsequently announced the government's intention to introduce the CCL on energy use by business with effect from April 2001. Simultaneously, HM Customs and Excise launched a major consultation exercise with business and other interested parties on the design issues surrounding the levy, 'to ensure that its environmental benefits were maximised whilst the competitiveness of UK business was protected.'

Yet the tax looks set to rip into the profits of many companies rather than protect them. Small and medium-size companies will be far worse off than large energy-intensive industries such as steel and cement because many of the big players in approximately 40 sectors have been able to negotiate 80 per cent discounts from the tax through trade associations in return for agreeing to implement energy-efficiency measures by 2010. The UK Treasury expects the levy to raise £1bn in its first year, and says it will have a "neutral" effect on industry generally, but some tax experts would beg to differ. An Ernst and Young study carried out for the Engineering Employers Federation estimates that the tax will hit around 2,300 small and medium-size businesses, with 1.3m employees. Their electricity bills will rise by an average 8 per cent and their gas bills by an average 15 per cent.

The Confederation of British Industry (CBI) is suitably concerned and is pressing for changes to the CCL, saying ministers should help industry improve the environment by offering discounts to more firms that meet energy reduction targets.

Michael Roberts, Director of Business Environment, said in a statement: 'Business supports the government's environmental objectives, but it is worrying that so many firms are ineligible for discounts. The aim of the tax should be to change behaviour, not to raise public funds. Any group of firms that is willing and able to take on a challenging environmental target should get a reduction. Nobody should get the idea that discounts are the environmental equivalent of a free lunch. Firms can only get them if they meet tough targets for reducing emissions.'

The CBI says the levy will create unnecessary market distortions because some firms qualify for discounts while others do not and has warned that different approaches in other European countries mean UK companies will be at a significant disadvantage. The German government, for example, has made all manufacturing companies eligible for a discount on its energy tax.

Mr Roberts concluded: 'Firms of all sizes will be affected by the levy, including major manufacturers competing in tough international markets and small firms operating on tight margins. With signs of a slowdown in the global economy, companies that want to invest will see this as coming at a very bad time.'

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