Corporation tax is the tool to incentivise net zero

The Institute of Directors has today published new data demonstrating that firms that currently have no plan to become net zero would be significantly more likely to do so if it would reduce their corporation tax bill.

Two-thirds of SMEs who currently have no plan to achieve net zero say they would either be ‘much more likely’ (32%) or ‘a bit more likely’ (32%) to do so if it resulted in a lower corporation tax bill.

The same survey showed that less than three in ten SMEs (28%) currently have a plan to achieve net zero, insufficient to achieve our national goal. Independent research by Sage shows that 44% of commercial carbon emissions come from these smaller businesses.

Kitty Ussher, Chief Economist at the Institute of Directors, said:

“Corporation tax is the tool to shift the dial on net zero among SMEs. Because government policy has so far focussed on the larger emitters, only a very small proportion of SMEs currently have a plan to hit net zero. They tell us that the main reason is the lack of a clear business case, which is a particular problem for individual firms where energy is only a small part of their total costs. Yet, taken together, smaller companies account for nearly half of total industrial emissions. We cannot meet our carbon goals without them.

“In order to incentivise the change, our proposal is that companies that can demonstrate net zero should pay a lower rate of corporation tax. This could work in a very simple way: when firms prepare their financial accounts they would also assess their carbon footprint and pay the appropriate tax rate on their profits depending on the result. This would be a clear and simple mechanism for change that sends a strong signal as to what is required.

“We therefore urge the government to announce its intention to proceed down this route, and to start work on the necessary differential in rates in line with the prevailing conditions and to elicit the necessary response.”

Further detail on the IoD proposals can be found in its policy paper, ‘The Green Incentive: how to put net zero at the heart of business planning’.

Full survey results

859 responses collected between 10-26 February 2023

Does your organisation have a plan to become net zero by a specific date?

You said your organisation did not have a plan to become net zero by a specific date. If in the future the government were to announce that net zero firms would pay a lower rate of corporation tax on their profits, would that make your organisation more likely to make the required changes to become net zero, or would it make no difference?