Memorandum submitted by Hambleside Danelaw
Ltd
EXECUTIVE SUMMARY
1. Hambleside Danelaw is a UK manufacturer
of roofing products. In 2006, it won the Queen's Award for Enterprise:
Innovation for the ground-breaking design behind its energy-efficient
Insulator rooflight and three major environmental awards.
2. The Group welcomes the focus of the EAC's
inquiry on the effectiveness of the regulatory and incentive policies
to reduce carbon emissions from new and existing buildings. It
has been lobbying the Government and the Stern Review on the issue
for the past 18 months.
3. A widespread lack of compliance within
the building industry in respect of the energy efficiency provisions
of the Building Regulations leads Hambleside Danelaw to propose
that a carrot in the form of tax incentives would be far more
effective than a stick in the form of even tougher regulation.
4. Hambleside Danelaw was encouraged that
in the case of the building industry, Stern shared this view.
5. The Group's proposals, which were submitted
in advance of the Pre-Budget Report, centre on a change to the
Industrial Buildings Allowance (IBA) and business rates in order
to provide greater incentive to construct buildings which exceed
the basic energy efficiency performance targets set out in the
Building Regulations.
6. The cost to the Government of these proposals
appears not to be substantial; indeed the benefits to business
of a better more energy efficient building could well lead to
a reduction in their operating costs through energy savings, with
a resultant increase in profits, thus increasing tax revenues
for the Treasury.
7. The Treasury's response to the Stern
Review in the Pre-Budget Report's recommendations on buildings
was to focus on the housing market. While this was laudable, Hambleside
Danelaw would naturally have liked it to have been more ambitious
in its scope. The Group hopes that further progress can be made
in the full Budget.
ABOUT HAMBLESIDE
DANELAW LTD
8. Hambleside Danelaw Ltd (www.hambleside-danelaw.co.uk)
manufactures Glass Reinforced Polyester (GRP) rooflights and other
roofing and ventilation products in Daventry and Inverness. In
2006, it won the Queen's Award for Enterprise: Innovation for
the ground-breaking design behind its energy-efficient Insulator
rooflight for commercial buildings. The Group also won three leading
environmental awards, including a Business Commitment to the Environment
award, to add to others awarded in previous years. It made two
submissions to the Stern Review on the Economics of Climate Change
(according to the index of responses, it was one of only two organisations
from the building industry to participate in the Review's initial
consultation).
9. Hambleside Danelaw's turnover is currently
in excess of £10 million a year and it employs almost 90
people. The Group was established in 1975 with its first factory
at Inverness for manufacturing GRP products becoming operational
in 1978. In addition to attaining BS 14001:2004 in recognition
of its environmental management systems, the Inverness facility
has achieved carbon neutrality. Hambleside Danelaw's greenhouse
gas emissions are monitored by the Edinburgh Centre for Carbon
Management and offset. Offsetting is achieved through the Trees
for Global Benefit scheme in the Bushenyi District, Uganda. This
project uses the Plan Vivo system which offers a tried and tested
system for generating carbon offsets.
10. Examples of Hambleside's good practice
include using recycled glass instead of sand to reduce the input
of virgin raw materials into the manufacturing process and reducing
heating in the factory by 13%. Lower costs for waste disposal
have also been achieved despite increased transport costs. All
of Hambleside Danelaw's staff have received environmental training
and have been involved in the management system from the initial
review to reaching the agreed environmental targets. As part of
its ongoing commitment to the environment, the Group has noted
that the recycling of fibreglass is not being carried out on a
commercial scale anywhere in the UK. Therefore by developing new
materials, it is encouraging the recycling of this material and
it hopes to expand the system to allow it to take waste fibreglass
from other companies in Scotland. The new materials developed
will also encourage the use of glass plastics and thereby reduce
the amount of new aggregates being extracted and the use of other
virgin materials.
TAX INCENTIVES
TO ENCOURAGE
BETTER ENVIRONMENTAL
PRACTICE IN
THE BUILDING
INDUSTRY
11. Hambleside Danelaw is encouraged that
a particular focus of the EAC's inquiry is on the effectiveness
of the regulatory and incentive policies to reduce carbon emissions
from new and existing buildings.
12. This follows the attention given to
buildings' emissions in Sir Nicholas Stern's report on the economics
of climate change, which was published in October 2006. The report
appeared generally more supportive of punitive taxes against organisations
and individuals who exceed regulatory limits on carbon emissions
than tax incentives for those whose emissions are inside the limits.
But in acknowledging the technology market failure in the construction
industry, it agreed that direct financial incentives may be the
answer for the building sector.
13. Echoing the points made by Hambleside
Danelaw in its own submissions to the Review, Stern recognised
that while architects may be knowledgeable about sustainable technologies,
the lack of a coordinated approach within the industry remains
a "key barrier" to progress.
14. The Group strongly supports the Review's
conclusion that by paying a little more now, one will save a great
deal more later. It believes that this mitigation argument is
particularly applicable to the construction industry where many
builders still spurn using insulated materials that comply with
the Building Regulations in order to save on costs. Using Stern's
calculated cost of carbon at $85 per tonne, Hambleside Danelaw
estimates that with its own Insulator rooflight delivering a CO2
saving of 50 tonnes per year on a typical 1,000 square metre installation,
the additional £8,000 cost of the rooflight compared with
one which just complies with the regulatory limits would soon
be offset by a carbon energy cost saving of £2,500 year on
year. This does not take into account additional savings being
realised through a reduction in heating and lighting costs.
ISSUES WITH
THE BUILDING
REGULATIONS
15. Hambleside Danelaw recognises that there
is a major onus on product suppliers to market more effectively
the potential long-term energy savings of using insulated building
materials. A key marketing-related issue, however, is that in
general the builder walks away from his responsibility for the
sustainable elements of a commercial building after the completion
of construction (typically, a nine-month period) when the building
itself might stand for 50 years. He will probably not be interested,
for example, in the end-user benefits of insulated rooflights
which include more people working and living in day-lit spaces
leading to improvements such as better workforce productivity,
health recovery times, student performance levels and retail sales.
16. To expand on this, the building process
can appear complex. The building designer or architect acting
on behalf of the developer will design a building. They will specify
the various materials to be used and seek to ensure compliance
with the Building Regulations. The next stage is for a contractor
to quote for the work and as is so often the case in the UK, it
is usually the cheapest price that will "win" the contract.
Cheap usually comes at a cost and that cost may well be a reduction
in the quality of the specified products which can be detrimental
to the environmental performance. There may be several layers
of contractors involved in the various stages of construction,
each element being very competitive in order to gain the work
from the main contractor.
17. The builder's biggest concern is to
achieve the contract and for maximum profit. With his prime interest
in the building being only for the nine months or so average build
time, it is the building occupier who will thereafter suffer the
problems—either through high maintenance costs or poor energy
efficiency. Either way there is financial and long term environmental
cost to the occupier and indirectly to the Exchequer as a result
of reduced profits from day to day operations.
18. Historically the Government has tried
to address this market failure by opting more for the "stick"
rather than the "carrot", most notably in the form of
Part L of the Building Regulations for England and Wales. As the
Government acknowledged in the consultation in 2005 on amending
Part L, the effectiveness of the regulations has heavily undermined
by a widespread lack of compliance on the part of builders.
19. When the Department for the Communities
and Local Government (DCLG) introduced revised regulations in
April 2006, it seemed that there had been a genuine attempt to
tighten the required energy performance of a building and its
enforcement. However, Hambleside Danelaw remained concerned that
the complexity of the regulations (the Group described them at
the time as "a recipe for confusion" amongst specifiers
and contractors) would leave the compliance problem unresolved.
The concerns appear to be borne out by the outcome of a recent
online consultation exercise undertaken by the DCLG on the regulations,
which generated a huge number of responses, with the issue of
complexity being a predominant theme.
20. Just a short time ago, the traditional
GRP rooflight would have had a U value (the measurement used for
heat loss) in excess of 3.3. The Building Regulations of 2002
addressed this to a certain extent and the U value of a rooflight
was reduced to an average of 2.2. However, the regulations at
that stage, permitted a form of "offset" which meant
that many buildings were constructed still using the old rooflight
construction method. The revision in 2006 resulted in a tightening
of the requirements but the standard elemental U value requirement
for rooflights remained at 2.2. Why?
21. It is now perfectly feasible to produce
a high performing environmentally sound rooflight product with
U values proven to be as low as 0.8—at a cost differential
of approximately 30% over the base rooflight product. Indeed Hambleside
Danelaw believes that the technology is now commercially viable
to obtain values below 0.5. The energy savings are proven to be
substantial (please refer to the graph appended to this submission)
This coupled with the fact that new materials have now allowed
rooflights to have a service life of 45 years reflects the advances
made in this product but at a cost.
22. The cost differential of £8,000
between an advanced rooflight product and a base product over
a 1,000 square metre installation might seem very small, but in
the scenario of building "cheaply", it is a major consideration.
This acts as a discouragement for further investment in technology
and slows the rate of advance in the building industry as a whole.
Furthermore it does not help in the fight against climate change.
23. Since Stern was published, the Group
has become further concerned by the less onerous guidance offered
by the Building Research Establishment (BRE) in relation to the
installation of rooflights as part of the "officially approved"
compliance information available from the National Association
of Rooflight Manufacturers (www.narm.org.uk). Hambleside Danelaw
has been informing potential customers that rooflights covering
20% of an industrial building's roof area is now a feasible, realistic
and cost effective proposition for improving levels of natural
daylight and reducing the daytime need for artificial lighting.
However, the latest BRE guidance, which allows easier attainment
of building emission targets than anticipated last April, acts
as a disincentive to expanding the rooflight area.
SPECIFIC PROPOSAL
FOR TAX
INCENTIVES FOR
USING INSULATED
BUILDING MATERIALS
24. For the past 18 months, Hambleside Danelaw,
with invaluable support from its two local MPs, has been lobbying
the Government for a change in taxation in so far as it relates
to the construction of non-domestic buildings. The lobbying led
to a meeting with the Financial Secretary to the Treasury in the
run-up to the Pre-Budget Report 2006. Hambleside Danelaw undeniably
has a vested interest in pursuing this campaign, but it is its
attitude to the environment and its excellent track record in
this area which is driving the Group forward on this issue. The
Group makes no secret of the fact that it believes that a successful
future as a manufacturer lies in the development of new era products
which are "green". It has an environmental, corporate
and social responsibility to ensure this.
25. Hambleside Danelaw is not a tax expert
and appreciates that this is a complex subject. However, its experience
of the building industry suggests that using a "carrot"
is more likely to have an impact on the industry's behaviour.
Therefore its proposals, which have been submitted to the Treasury,
are focused on the introduction of new tax incentives.
26. The basic premise revolves around a
change to the Industrial Buildings Allowance (IBA) and business
rates—to provide greater incentive to construct buildings
which can show that they exceed the basic performance targets
set out in the Building Regulations. It has taken the IBA system
for the basis of the example, but similar encouragements for improved
environmental building performance could possibly be achieved
through variations in stamp duty levels. It would be a consideration
that these changes should apply to new build and refurbishment
projects in order to encourage the older building stock, domestic,
commercial and industrial to be "environmentally modernised".
27. In the opinion of Hambleside Danelaw,
these changes if implemented would focus the mind of not just
the developer, but also encourage the building occupier to ask
more questions about the environmental performance of the building
he is about to occupy. Both parties would gain from enhanced property
values, rental incomes, energy savings, carbon emissions reductions,
and improved building quality.
28. Hambleside Danelaw has proposed the
following:
(a) For all buildings that just meet the
basic performance target set out in the Building Regulations,
that the IBA is reduced to 2.0% from the current 4% rate.
(b) Where it can be certified that the materials
used within the construction improve its performance beyond that
basic performance target plus say 15%, that the IBA be 4%, as
now.
(c) For buildings that can show they have
used materials which go beyond the basic target performance standard
plus say 30%, the IBA increases to 6%.
29. The products required to achieve the
better performance may increase new build cost in a range of 5
to 10%, but improved IBA allowances, and improved rental levels
due to better building performance and potentially enhanced resale
values would all help to encourage better practice.
30. The following table provides a basic
illustration of the IBA tax relief structure on a typical new
build cost for a factory/warehouse unit:
EXAMPLE OF TYPICAL BUILD COSTS FOR A 5,000
SQUARE METRE INDUSTRIAL UNIT WITH OFFICE ACCOMMODATION (BASED
ON ASSUMED 10% EXTRA BUILD COST)
| Taxation relief IBA
| £3 million Basic standard property—effective tax relief
| £3.15 million 15% + Enhanced environmental performance
| £3.3 million 30% + Enhanced environmental performance
|
| IBA current 4% | 120,000 at 30% rate = £36,000 per annum
| 126,000 at 30% rate = £37,800 per annum
| 132,000 at 30% rate = £39,600 per annum
|
| Proposed IBA 2.0% | 60,000 at 30% rate = £18,000 per annum
| | |
| Proposed IBA 4% | | No change
| |
| Proposed IBA 6% | |
| 198,000 at 30% rate = £59,400 per annum
|
| Savings (Cost) to Treasury | £18,000
| No change | (£19,800)
|
| | |
|
NOTES TO
THE TABLE
1. It can be seen that under current tax relief structure
a building which could cost between £150,000 and £300,000
extra to build only attracts additional tax relief per annum of
£1,800 or £3,600 respectively—this does not in
Hambleside Danelaw's opinion, provide an attractive enough basis
for encouraging better building practice.
2. Whilst those buildings meeting minimum standards attract
a reduced tax allowance, those achieving a better performance
gain, a 15+ improvement would mean that for a 5% assumed increase
in build cost there would be an additional £19,800 per annum
tax allowance, and for a building meeting even better requirements
there would be a further £41,400 to help fund the additional
extra £300,000 of investment.
3. The net cost to the Government of the IBA changes is
modest unless all development switched to the higher performance
category, in which case the additional cost over the current position
would be £19,800 per annum, over approximately 17 years rather
than the current 25 years. Over time it is revenue neutral, although
it is appreciated that there is additional expenditure over that
17 years.
4. The main corporation tax rate at 30% has been used
for the purposes of this example.
31. Under these suggestions, there would appear to be
a real incentive for improvement in the UK building quality and
sustainability.
32. Sustainability itself is another key issue, the longer
the service life expectancy of the materials used within construction,
the better for the environment. Older building stock has lasted
literally centuries. In the aftermath of the Second World War
building quality deteriorated and the effects of that can be seen
all around: schools of the 60s requiring rebuilding, poorly constructed
flats requiring demolition—all within the terms of building
life and after just a very short time, which is neither cost effective
financially nor environmentally.
CHANGES TO
THE BUSINESS
RATES
33. It has been explained that the builder has a short
term interest in the property—limited effectively to the
construction phase. The developer potentially has a long-term
interest but he may not be the occupier. It is the occupier who
will see the benefits from reduced energy costs etc. He can therefore
influence the building performance. He can demand better materials
be used. He may pay more in rental cost, but he will gain in other
savings, for example, reduced artificial lighting, reduced heating
or air conditioning requirements.
34. A small change in business rates could assist in
encouraging better build practice. Consideration should perhaps
be given to increasing the business rates for new buildings, which
again only meet the basic building envelope target, by say 5%,
but with the rating level remaining at current levels for those
exceeding that minimum target performance by 15%.
CONCLUSION
35. These changes to the taxation system, if implemented,
would, it is believed, provide the incentive for the building
industry and its suppliers to invest in the new technologies required
to meet the increasing demand for environmentally responsible
products. They would help address the market failure referred
to by Sir Nicholas Stern in his report.
36. The cost to the Government of this appears not to
be substantial; indeed the benefits to industry of a better more
energy efficient building could well lead to a reduction in their
operating costs through energy savings, with a resultant increase
in profits, thus increasing tax revenues for the Treasury.
37. The Treasury's response to the Stern Review in the
Pre-Budget Report's recommendations on buildings was to focus
on the housing market. While this was laudable, Hambleside Danelaw
would naturally have liked it to have been more ambitious in terms
of scope. The Group hopes that further progress can be made in
the full Budget.
January 2007
| 
