As environmental sustainability becomes a key business priority, UK companies are facing increasing pressure to reduce their carbon footprints.

With small businesses contributing nearly 50% of business-driven emissions, sectors such as manufacturing and logistics must implement decarbonisation strategies to remain competitive. Leveraging grants, tax incentives, and funding opportunities can help businesses meet environmental targets while improving financial performance.

In this article, we explore how companies can access these resources to drive their sustainability agenda. The financial case for decarbonisation Decarbonisation is not only a regulatory requirement but also an opportunity to gain a competitive edge. According to Deloitte, businesses that integrate sustainability into their operations can benefit from more favourable financing terms and access to green funding, enhancing their overall financial health. For logistics firms, this is crucial, as the transition to greener technologies often requires significant up-front investment. However, the long-term savings particularly from reduced energy costs and lower taxes can off set these initial expenses.

A report from the British Business Bank highlights that 76% of smaller UK businesses are still in the early stages of their decarbonisation journey, although 94% have already taken at least one action to reduce emissions. Despite this progress, only 47% consider carbon reduction a high priority, with many citing costs as a barrier. For logistics and manufacturing companies, access to external finance, including grants and tax reliefs, is essential to overcoming these barriers and achieving net-zero targets.

Key tax incentives for ESG targets

• Capital allowances for green assets: the UK government offers capital allowances for businesses investing in energy-efficient equipment and renewable energy technologies. Currently, businesses can spend up to £1,000,000 per year on items and will receive a full deduction in the first year on items such as battery storage and solar PV systems. Any expenditure above this, will obtain relief for the first 50% and then the balance will be given at 6% per annum. There is also the potential for 100% relief (in excess of £1,000,000 of expenditure per annum) on other energy saving items, but these need to be looked at on a case-by-case basis.
• Electric vehicle incentives: transitioning from diesel to electric vehicles (EVs) is crucial for reducing emissions and meeting decarbonisation goals. The government offers several tax incentives, such as reduced Benefit-in-Kind (BIK) rates for company-provided EVs. Additionally, the costs of installing charging stations at employees’ homes are tax-free, making fleet modernisation financially viable for companies.
• Grants for energy efficiency: businesses upgrading to energy efficient technologies, such as LED lighting or automated HVAC systems, can access grants to help cover the costs. Furthermore, the Climate Change Levy (CCL) offers exemptions for businesses that meet energy efficiency standards, reducing the tax burden linked to energy usage.

• R&D tax credits: innovation is key to meeting decarbonisation targets, and companies investing in green technologies can claim R&D tax credits. These credits are available for businesses developing new products, such as energy-efficient vehicles or waste reduction systems, helping to off set the cost of research and innovation.

• VAT reductions for energy-saving products: contractors or subcontractors installing energy-saving materials or grant-funded heating equipment should be aware that the VAT rate for energy-saving products in the UK is currently 0%, but will rise to 5% on April 1, 2027. Th e VAT relief applies to a range of products, including solar panels, wind turbines, insulation, heat pumps, biomass boilers, micro combined heat and power units, and wood-fuelled boilers. It is essential to check with your accountant for the comprehensive list provided by the government.

Navigating the complex landscape of grants and tax reliefs can be challenging and each business will be different. Companies should work closely with tax experts who are up to date with the latest regulations and can tailor the claims for their particular circumstances.

The figures referenced in this article are sourced from reports by Deloitte, Crowe UK, and the British Business Bank.

Please note, this article was written before the Autumn Budget on October 30. As a result, some figures and policies mentioned here may change depending on new measures or updates announced in the Budget. Stay informed on developments that could impact the grants, incentives, or tax reliefs discussed. The latest budget report will be available on Cottons Group’s website, where updated details will be provided.

Luke Prout – Tax Partner (Cottons Group)

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