Preparing for Potential Windfalls: Tax Relief Opportunities in Green Construction

14 May 2024

With the UK construction industry firmly setting its sights on green building initiatives, there are emerging tax opportunities for UK construction companies. This trend of ‘going green’ is part of a broader commitment from the UK government to transition to a net-zero economy by 2050.

Understanding Green Construction in the UK

The construction industry’s future appears vibrant with sustainability at its core. Some notable green trends include green building and net-zero design, modular building, Ground Source Heat Pumps (GSHPs), geothermal energy, and living materials.

Significantly, an estimated £90 billion is anticipated to be invested across the green building sector by the end of the decade. This investment, alongside the government’s commitment to a net-zero strategy, provides reassurance to businesses and adds confidence to this transition to a low-carbon economy.

Sustainable Tax Relief: Encouraging Investment in Green Construction

The importance of green construction in meeting the UK’s environmental targets cannot be understated. With the abolition of the enhanced capital allowances regime (ECAs) in 2020, there is a demand for tax incentives that stimulate businesses to make low carbon property investments. One such example is land remediation relief, which allows qualifying companies to claim a tax deduction equal to 150% of the cost of removing harmful contaminants, such as asbestos from buildings.

A comparable tax relief for companies retrofitting buildings to reduce carbon emissions could prove attractive. Extending the VAT zero-rate or the 5% reduced-rate for the retro-fitting of residential property could further encourage energy efficiency improvement expenditure on existing properties.

There is also scope for tax reliefs to encourage research and development in the construction industry. Companies engaged in innovative work, such as developing more efficient construction techniques or incorporating more recycled or energy-efficient materials into buildings, can claim research and development tax relief.

While this relief is not unique to the construction sector, it demonstrates a growing trend in tax relief claims from businesses with a greater focus on Environmental, Social, and Governance (ESG) commitments.

Case Study: The Green Construction Tax Advantage

Consider a hypothetical UK construction firm, BuildGreen Ltd, investing in modular building, which has seen a significant surge in popularity due to its potential for reducing waste and emissions. Suppose this company incurs costs for R&D in innovating and developing new modular building techniques. These costs are eligible for the R&D tax credit scheme.

This relief can make a significant difference in their financial performance, enabling them to invest further in sustainable construction, thereby promoting a virtuous cycle of investment, innovation, and growth.

Conclusion: The Financial Merits of Going Green

Green construction presents a twofold opportunity for UK businesses. On one hand, it aids in the transition towards a more sustainable and ecologically responsible future. On the other hand, it opens up potential avenues for significant financial benefits through tax relief schemes.

In this evolving landscape, businesses should stay vigilant to ensure they are fully leveraging the potential windfalls these schemes present. They must also stay up-to-date with any changes in the tax landscape, which is likely to reflect the government’s evolving environmental priorities.

The interplay of sustainability and taxation in the construction industry is an opportunity that UK businesses must grasp with both hands. It’s not only about saving the environment; it’s about creating a more sustainable and financially robust future for the business itself.

Talk to our experts about how your company can utilise any potential VAT or R&D tax credits to maximise profitability.

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