Decarbonization is the process of reducing greenhouse gas emissions and moving to a low-carbon economy. Decarbonization requires significant investment in green technologies such as renewable energy, energy efficiency, electric vehicles, and carbon capture and storage.
These technologies often have high initial costs, long payback periods, and uncertain returns, making them risky and expensive to finance. Companies are facing unprecedented and large-scale capital investment needs.
One answer may be the UK tax system. Tax incentives can be used to finance decarbonization. A clear example is the US Inflation Control Act. As part of this autumn’s statement, the government announced that so-called “full spending” (100% upfront tax relief on capital expenditure on infrastructure through the Capital Allowance Act) would be made permanent. This is not just about decarbonization. Investments do not have to be green to qualify. But it is clear that “full spending” is intended to support the costs of decarbonisation.
However, there’s one problem. In many cases, investment costs are so high that companies cannot earn enough taxable profits to benefit from his 100% relief. Finance leasing may provide the answer.
Until the financial crisis, tax-based finance leases were a common tool used by UK banks to finance large capital investments in the UK. One advantage is that banks can take advantage of accelerated depreciation provided by the capital allowance scheme for their customers. You will have enough taxable profits to use them, reducing your cost of funds.
Over the past 15 years or so, tax-based finance leases for large infrastructure assets in the UK have fallen out of favor. One reason for this is that low interest rates have reduced the cost of regular bank funding.
However, this situation may change. We currently live in a higher interest rate environment, and I don’t see this situation changing anytime soon. Perhaps more importantly, full expensing resulted in a 100% capital allowance rate.
However, there remains one major hurdle to tax-based finance leases in the UK. That is, you cannot take advantage of 100% capital allowances with a lease. This means that the renter cannot claim the full value of the property as a tax deduction in the year of purchase. The rules have been introduced to prevent schemes that abuse the 100% capital allowance rate on certain assets such as energy-saving plant and machinery, low-emission vehicles and zero-emission vehicles.
Recent positive developments include the UK Government’s announcement in the autumn of this year that it would consult on the removal of this prohibition, allowing tax-based finance leases to become an effective means of funding capital investment. may be revived. The government has set its sights on the UK’s net zero target by giving businesses access to green technology and reasoning that a 100% capital allowance rate will encourage lenders to invest in green technology and pass the tax savings on to borrowers. It was confirmed that the entire cost would be used to support the . The government also said changes to tax rules will ensure mistakes, evasion and fraud are minimized.
If the government implements its proposals, tax-based finance leases could be revived in the UK, particularly to finance decarbonisation. Finance leases can offer a flexible, affordable and tax-efficient way for businesses to acquire and use green technologies, and for landlords to deliver them at a profit. Finance leases also have the potential to stimulate markets for green technologies, creating demand, innovation and jobs. Finance leasing can therefore be a win-win solution for both lenders and lessees, as well as for the environment and the economy.
