Environmental tax measures - National Audit Office

Today’s (12/2/21) report from the National Audit Office (NAO) has found that HM Treasury and HM Revenue & Customs have a limited understanding of how far the tax system supports government’s environmental objectives.

Tax measures can be an important tool in implementing environmental policy, by taxing goods or services which harm the environment and incentivising businesses and citizens to change their behaviour. The exchequer departments administer four taxes with explicit environmental objectives (environmental taxes) – Climate Change Levy; Carbon Price Support; Landfill Tax; and Aggregates Levy. These taxes raised £3.1 billion in 2019. The government plans to introduce a fifth – the Plastic Packaging Tax – from April 2022.

When designing environmental taxes, the exchequer departments carry out many important practices the NAO would expect, such as consulting with stakeholders and ensuring taxpayers get advance warning so they can prepare. However, they do not quantify all costs and rarely specify how they will measure environmental impact to allow Parliament to assess if taxes are meeting their objectives.

The NAO has found that HMRC only has limited insight into the environmental impact of taxes. HMRC has formally evaluated the impact of Landfill Tax but has not carried out any further evaluations of the impact of environmental taxes. In 2020, HMRC developed a single strategy for reducing the risks that environmental taxes are not paid. However, HMRC only has a partial understanding of the tax gap (the gap between tax due and collected) for three of the four environmental taxes.

Landfill Tax has reduced use of landfill sites significantly, but it has also incentivised more illegal disposal of waste. Between 1998 and 2014 HM Treasury increased the standard rate of Landfill Tax by 700% in real terms, contributing to a 65% fall in total waste to landfill over the period. However, HMRC estimates that the misclassification of waste at authorised landfill sites and waste disposed at unauthorised sites reduced Landfill Tax revenue by around £275 million (28% of tax due) in 2018-19. This figure does not include any revenue lost from illegal exports of waste and fly-tipping. HMRC has sought to reduce tax lost by increasing its compliance work and extending the scope of the tax to unauthorised sites. In 2020, government established a waste crime unit, including HMRC, to tackle the illegal disposal of waste.

In addition to the four environmental taxes, there are other taxes that have an impact on the environment, such as fuel duty and Air Passenger Duty, which do not have an explicit environmental objective. The exchequer departments told the NAO that they measure the performance of these taxes primarily in terms of revenue raised. However, they are increasingly considering their environmental impact, for example in the 2020 Budget it was announced that the government would restrict entitlement to the reduced rate of fuel duty on diesel used in off-road vehicles, specifically to improve air quality and reduce CO2 emissions.

Access the full report.

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Posted On: 12/02/2021

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