A new report by the National Audit Office (NAO) examines how the Treasury and HMRC manage tax measures with environmental objectives, including the work undertaken to design, monitor and evaluate them. It explores how these ‘exchequer departments’ use their resources to manage the relationship between the wider tax system and the Government’s environmental goals, including its statutory commitment for the UK to achieve net zero greenhouse gas emissions by 2050.
The NAO finds some evidence of the positive impact that taxes can have on the environment, but too little is known about their effect, it says. The exchequer departments tend to focus more on the revenue that environmental taxes raise rather than the environmental impact they achieve. There are other measures – both taxes and tax reliefs – which impact on government’s wider environmental objectives but which are not recognised as environmental in nature. As such, the exchequer departments do little to identify these measures, or assess their relevance to government’s environmental goals, says the NAO, though they do consider environmental impact in some significant cases when advising ministers.
The scale of government’s environmental ambitions, particularly on net zero, means government needs to consider every tool at its disposal if it is to succeed, suggest the NAO. The exchequer departments need to fully understand the relationship between existing taxes and these ambitions and to learn lessons for any future taxes which may support wider environmental strategies. The NAO says the Treasury’s review of how the transition to net zero will be funded is an important first step in this process.
The NAO is the UK’s independent public spending watchdog. It supports Parliament in holding government to account and helps improve public services through ‘high-quality’ audits.
The report notes that, for the report, the NAO interviewed a range of organisations and individuals with an interest in environmental tax measures, including members of CIOT’s Climate Change Working Group.
Among the NAO’s key findings on designing, administering and monitoring environmental taxes are –
Environmental taxes raise design, monitoring and review challenges because they have policy objectives beyond just raising revenue. These include that an environmental tax can be more complicated to design because it is seeking to change behaviour, and the impact can be more difficult to evaluate.
The design of environmental taxes follows many practices the NAO would expect but the exchequer departments do not quantify all potential costs before recommending options. For example, for the new Plastic Packaging Tax, the NAO finds the departments had undertaken extensive work to understand the possible impacts of the tax but they had not quantified the administrative costs for business.
The exchequer departments do not specify how they will measure the impact of environmental tax measures. The NAO suggests that setting out clear metrics in TIINs (Tax Information and Impact Notes), for example on carbon emissions or the production of new plastic, would assist parliamentary scrutiny.
HMRC recognises it has a partial understanding of the gap between tax due and collected. For example, HMRC only have a standalone estimate of the tax gap for Landfill Tax.
Landfill Tax has reduced the use of landfill sites significantly, but it has also incentivised more illegal waste disposal, notes the NAO. HMRC estimate that the misclassification of waste at authorised landfill sites and waste disposed at unauthorised sites reduced Landfill Tax revenue by around £275 million in 2018- 19 (28 per cent of the tax due). This figure does not include any tax lost from illegal exports of waste and fly-tipping.
HMRC’s approach to evaluation provides it with limited insight into the environmental impact of taxes. The tax authority depends on environmental data collected by third parties, feedback from stakeholders and tax receipts to assess impacts and advise ministers. This information can provide some indication of environmental impact, but it will rarely be sufficient to determine how far an environmental tax has changed behaviour, remarks the NAO. The NAO also said the impact of the Aggregates Levy on the use of recycled aggregate cannot be determined from the data HMRC has collected.
NAO also made observations on managing the relationship between the wider tax system and the Government’s environmental goals.
There are other taxes which the exchequer departments manage which they acknowledge have an impact on the environment. The Office for National Statistics’ (ONS) data show that taxes and charges on environmentally harmful goods and services raised £51.6 billion in 2019.
The report complains that HMRC has limited information on the cost and impact of tax reliefs with an environmental impact. The NAO says that given the Government’s environmental ambitions, in particular its binding net zero target, it is important that policy interventions which impact on the environment are identified and understood. Of the 25 tax reliefs that cost more than £1 billion a year, the NAO identified five that are likely to reduce the cost of producing or consuming products made from or using fossil fuels, including lower VAT on domestic fuel and power; the total estimated cost of these reliefs was £17 billion in 2019-20.
The report finds the exchequer departments do not centrally oversee how the tax system impacts on government’s environmental goals. And the NAO believes the Treasury’s review into how the transition to a net zero economy will be funded is an important component in implementing government’s environmental commitments. Alongside the Treasury’s review, Department for Business, Energy & Industrial Strategy (BEIS) is developing government’s wider net zero strategy. The exchequer departments plan to work with BEIS and other stakeholders during development of the strategy to consider the mix of policy levers needed to meet net zero.
The NAO recommends that the exchequer departments should –
- identify and monitor existing tax measures with a significant environmental impact
- clarify and set down their approach to designing, administering and evaluating tax measures with environmental or other policy objectives
- develop clear criteria for prioritising which taxes with an impact on the environment to evaluate, taking into account risks to value for money and the costs of evaluation
- quantify and publish the expected environmental impact of changes to taxes, where significant
- work with other departments to make visible how existing tax measures affect environmental goals
- monitor the long-term impact of government’s environmental goals on tax revenue and ensure these are considered as part of risk management
The full 12 February 2021 report is here.