The aim of CS3D
CS3D aims to foster sustainable and responsible corporate behaviour by establishing due diligence requirements for both human rights and the environment.
CS3D requires in scope businesses to identify, manage, prioritise, prevent, mitigate and eliminate adverse impacts of chain of activities of companies' operations, the operations of their subsidiaries, and business partners on human rights and the environment.
Unlike most other ESG obligations currently in force, this will not be a "comply-explain" obligation, but a "comply or be liable" obligation. It will require action beyond mere reporting, and it comes with regulatory, civil enforcement and compensation mechanisms. DWF has written more about what CS3D means for your business and how to prepare here.
How can the UK tax code help you meet your CS3D goals?
Governments often also use tax policies as a way to shape the behaviour of businesses and individuals (think plastic packaging tax, excise duty, sugar tax).
In the UK, there are several regimes which tax activities that the Government considers as harmful to the environment and wants to tax more heavily. These regimes include the climate change levy, landfill tax, the aggregates levy, plastic packaging tax and the oil and gas levy. Though some industries and sectors will inevitably be more exposed to certain taxes due to the nature of their business, all businesses can (and should, in light of CS3D requirements) integrate tax policy and ESG strategy, which can have the result of both mitigating tax liability and meeting the business' own environmental goals. For example, a business subject to plastic packaging tax can increase the proportion of recycled plastic used to manufacture packaging, reducing its exposure to tax along with its carbon footprint.
There are a number of tax reliefs available to encourage green investment, such as capital allowances for energy-efficient technology and VAT relief for energy-saving materials, demonstrating that tax can and should be an integral part of a businesses' overall ESG strategy.
Businesses may also wish to review their overall remuneration packages, and consider embedding compliance with CS3D and wider ESG strategies into the way employees, or key managers in the business, are incentivised. Carefully drawn up share plans can include performance conditions based around CS3D compliance or wider ESG goals. Properly implemented schemes can offer tax relief to individuals and companies, as well as helping the company meet its ESG goals, embedding strategies across the business, and incentivising staff.
Next steps
With CS3D now in force, now is the time to consider embedding its requirements within business policies and procedures. Embedding and aligning tax strategy with ESG plans can mitigate liabilities as well as helping to deliver on climate change goals. A responsible tax strategy also demonstrates to wider stakeholders that a business is committed to contributing to society.
CS3D requires in scope businesses to carry out due diligence in its supply chains. Whilst carrying out reviews of procedures, there is an opportunity to review tax due diligence in a business' supply chain, to tighten procedures and mitigate risk.
Large businesses with a presence in the UK (broadly with either a turnover above £200 million or a balance sheet over £2 billion, including at group level) are required to publish a tax strategy, which includes details of how businesses manage tax risks and their attitude to tax planning. With ESG practices having an increasingly important role in supply chains and winning business, it is more important than ever for businesses to have well designed policies.
Many businesses are turning to the Fair Tax Mark accreditation scheme for responsible tax conduct. As the Fair Tax Foundation say: "It is no longer enough for a business to claim that their tax conduct is acceptable as long as they are not breaking the letter of the law".
Our Sustainable Business and ESG Advisory Practice has a wealth of experience, and is currently assisting many businesses to develop their ESG strategies and meet climate change goals. Please see here for more information.
If you would like to speak to discuss with our specialist tax team about any tax and ESG issue, which may include policies, mitigating risk or implementing a share scheme, please speak to Caroline Colliston or your usual DWF contact.
