Tax is part of each element of the ESG agenda.
A business's approach to tax is no longer just a compliance matter; it impacts how the business is viewed by a wide range of stakeholders including governments, employees, customers and investors. Proper consideration of tax aspects of ESG gives a business the opportunity to shape how it is perceived by these stakeholders.
Environmental taxes such as the climate change levy, landfill taxes and the aggregates levy have been around for years. Environmental taxes can be used to encourage behaviour change by businesses and consumers. For example, in April 2022 the UK introduced a plastic packaging tax, which is aimed at encouraging the increased use of recycled plastics. Environmental taxes may become more prevalent as behaviour change will be required to meet the government's Net Zero targets.
Tax incentives for development of environmentally friendly technology or investment in green technology can also be used as a mechanism to change behaviour. Currently, green tax incentives are less well developed than environmental taxes in the UK and business green tax incentives are limited to 100% capital allowances for investment in environmentally friendly technology and tax relief for remediation of contaminated land. On the consumer side, the UK recently introduced zero VAT rating for the installation of energy saving materials in homes. The US has recently introduced a set of green tax incentives in the Inflation Reduction Act. Other jurisdictions may need to follow suit in order to compete to attract green growth industries and investment.
When viewed through the social lens, tax is a valuable contribution to society rather than a pure cost and it has become common to ask whether businesses are paying their "fair share" of tax. Businesses formulating their ESG agenda should consider the societal impact of their approach to tax, along with the reputational risks of tax avoidance.
Tax can also be used to meet specific societal aims, for example the off-payroll working rules aim to prevent to prevent the avoidance of employment taxes where workers provide their services through personal service companies. Similarly, the soft drinks industry levy or "sugar tax" aims to reduce sugar in soft drinks and tackle childhood obesity. Tax incentives can also be used as a lever to encourage societal objectives – in the US, the Inflation Reduction Act makes access to certain tax reliefs contingent on meeting pay conditions and the employment of a specified number of apprentices.
Industry specific tax regimes can be used to meet specific societal aims, such as targeting particular industries that have previously benefited from state support (e.g. the bank levy) or subjecting a sector to enhanced taxation (e.g. higher rates of corporation tax on oil and gas companies or special regimes for taxation of non-residents acquiring and disposing of UK real estate).
Tax incentives can be used as a mechanism to promote societal goods such as encouraging particular industries or facilitating job creation in a geographic area. For example, the UK has a number of different tax reliefs to support creative industries such as film production, video games and orchestras. Likewise, special tax regimes e.g. enterprise zones and free-ports can be used to attract businesses to deprived areas.
Our Tax team provides support to corporates, investors, asset managers, funds and pension schemes on a wide range of tax and ESG matters, both in respect of specific transactions and also as part of a wider package of support to individual businesses. We have particular expertise in the following areas:
