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Carbon tax needs to be carefully designed for change

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A carbon tax on UK imports would need to be carefully designed, with the CIOT arguing that rates should be set at a level that encourages behavioural change.

26th Jun 2024
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There is a “vital need” for the government to minimise the impact of a new tax on greenhouse gases produced in the manufacture of energy-intensive goods imported to the UK, with the compliance burden “likely to hit small businesses the hardest”.

The idea of a carbon tax has been in the air for some time, with Brussels launching one last year on imported steel, cement and other goods.

At the time, UK businesses were warned to be compliant or risk disrupted supply chains.

Fresh consultation

Earlier in 2023, Rishi Sunak’s Conservative government launched a consultation on a potential carbon border tax in an effort to protect businesses against cheaper imports from countries with less strict climate policies.

Following on from this, the introduction of a carbon border adjustment mechanism (CBAM) was proposed from 1 January 2027 on imports of certain carbon-intensive imported goods to the UK from sectors including aluminium, cement, ceramics, fertilisers, glass, hydrogen, and iron and steel.

A new consultation – which ended on 13 June 2024 – was subsequently undertaken jointly by HMRC and His Majesty’s Treasury (HMT) that set out proposals for the design and administration of the mechanism.

Level the playing field

The new tax would be designed to level the playing field with domestic production and encourage greener manufacturing, with those affected either reporting those emissions based on default values set by the government for each commodity type or calculating the actual emissions produced while creating the goods.

Mark Feldman, co-chair of the joint Chartered Institute of Taxation (CIOT)/Association of Taxation Technicians (ATT) Climate Change Working Group4, believes the CBAM compliance burden is “likely to hit small businesses the hardest”.

“Therefore, it’s vital the government minimises the impact if the proposal proceeds.”

Behavioural change

Stressing the importance of supporting climate objectives while balancing the administrative burden for businesses, he told AccountingWEB: “The principal aim of the scheme – supporting climate objectives – is behavioural change, in other words encouraging decarbonisation in the manufacture of products rather than revenue raising, though naturally revenue will be raised.

“If you want behavioural change from a tax, the rates need to be set at a level that encourages behavioural change without pricing it so high that the ability to conduct business becomes uncommercial.

“Where businesses are not able to obtain all of the relevant information to calculate the CBAM specifically on their imports – the administrative burden – there will be a ‘default value’ set by the UK. If the default is too high this will have a detrimental fiscal impact on businesses; if it is too low, some businesses will just pay it as a cost of doing business and it won’t necessarily encourage behavioural change.

“Wherever the price point of the default charge is set, there will be winners and losers so to speak.”

Monthly threshold

On how the government can ensure that the impact of any such CBAM proposals is limited for small businesses, he noted that, with the annual registration threshold on imported CBAM goods being £10,000 – which is set out in the consultation as a rolling daily threshold – the CIOT has asked it to be changed to monthly to ease the administrative burden.

“Anyone importing less than £10,000 of CBAM goods won’t be affected by the measures, but we urge the next government to look again at how that exemption will work.

“As proposed, if your imports in the previous 365 days go over £10,000 you’ll need to register for CBAM, but that means businesses will need to look at their import records every day to check whether they’ve breached the threshold.”

Feldman stressed that aligning CBAM with the registration requirements used for VAT and Plastic Packaging Tax would “simplify processes and reduce hassle for importers”.

“That would still mean checking the value of your imports against the registration threshold over the past year, but on a monthly basis instead of daily, as the current CBAM proposal would require.”

Replies (2)

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By FactChecker
26th Jun 2024 21:55

Mark Feldman told AccountingWEB: "The principal aim of the scheme – supporting climate objectives – is behavioural change, in other words encouraging decarbonisation in the manufacture of products rather than revenue raising, though naturally revenue will be raised."

It isn't fashionable to recognise the interaction between 'social change' and 'revenue collection' as the purposes of any particular tax legislation - and the immediate political horizon is even less clear than in the last decade - but those objectives ARE very much entwined.

So the attempt to try separating them by Mr Feldman is unwise.
At the simplest, I would expect any experienced policy maker to allocate (even if not hypothecated) the extra tax raised as an 'investment' (aka subsidy) in further complementary activities that support the overall efficacy of the plans for whatever the climate objectives then are.
[Otherwise you tend to get the old 'robbing Peter to pay Paul' effect, where the money-go-round may alter focus for a few but changes nothing fundamental for the majority.]

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By JohnB
27th Jun 2024 09:15

Of course it will hit small businesses the hardest. That's not a bug, it's a feature! 'Ease the administrative burden' - Thanks a lot.

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