Select Committee on Trade and Industry Written Evidence

Annex 1


  A company's overall objective, as a matter of general principle, is to be in a position to claim immediate tax relief for all expenditure, in a way that reduces the existing tax burden. Set out below are some of the potential mechanisms and Treasury policy positions that might facilitate this, but also some of the existing features of UK tax law that could frustrate it, and would therefore need to be addressed.

  Given the commercial uncertainty faced by bona-fide business ventures in light of recent trends in the volume of tax legislation, it would be useful for the industry to have the opportunity to work with HMRC to achieve some certainty on the tax outcome before committing to substantial investment. This might well be possible through existing tax clearance procedures.


  If project expenditure could be brought within either of two existing regimes covering Research and Development and Enhanced Capital Allowances, then 100% tax relief might be possible in principle, subject to the caveat below regarding timing.

  As an absolute minimum, relevant capital expenditure should be excluded from the unfavourable long life asset (LLA) regime. Given that their expansion is to be encouraged to meet Kyoto targets, Government should signal that renewable generation assets, including those recently completed or under construction, should not be expected to suffer LLA treatment as a matter of policy. Furthermore, if enhanced capital allowances are to be extended to cover renewable and other low-carbon technologies, the current bar[160] on potentially long lived assets qualifying for ECA should be removed.


Tax Nothings

  The CBI has made extensive representations on the feature of the UK tax system that has been called "tax nothings". These are items of bona-fide business expenditure which nevertheless do not qualify for any sort of tax relief—either as revenue or eligible capital expenditure. Arguably, a modern tax system should have already eliminated these to make it competitive internationally, but progress in the UK has been slow.

  In the context of a new low carbon development programme, there is a risk of some expenditure being treated as capital for tax purposes, and therefore not qualifying for revenue relief, but also not qualifying for capital allowances. That would be a tax nothing, which would clearly worsen the economic prospects of a project. It is understood that HMRC may already be pursing this line in the context of the wind industry.

  We are also aware of potential tax nothings in the area of gas storage, particularly regarding creation of underground storage facilities. This feature may also arise in carbon capture and storage infrastructure and would need to be addressed.

  The tax treatment of decommissioning costs would also need to be considered. We understand there are currently special provisions relating to the oil industry in this respect. Depending how the commercial arrangements for decommissioning costs were organised, it may be necessary to introduce new tax rules for low-carbon technologies to ensure that useful tax deductions would be available.

Timing of tax relief

  If expenditure does avoid being classified as a tax nothing, and is also in principle eligible for an immediate tax relief, the last hurdle to clear is for that tax relief to be utilisable.

  If, for commercial reasons, the development activity is in a new legal entity, then it would need to be accepted as "trading" for tax purposes for the tax reliefs to be of use. Otherwise, they would merely be deferred until the entity commenced commercial operations. This lead time could be significant for new technologies, for instance due to lengthy planning/consenting regimes. This would therefore greatly diminish the value of any tax reliefs.

  Any structure or tax regime where the tax reliefs were unavailable until successful operation of the plant, perhaps due to lack of trading for tax purposes, would represent a significant disadvantage.

  An additional point regarding timing is that we would be looking for maximum flexibility in utilising any tax reliefs from a joint project in the investing groups. If there were very high costs in a short space of time, the investors may need to be able to spread the utilisation of the losses over time, perhaps to avoid locking them as carried forward in the new legal entity itself.

Uncertainty over Power Purchase Agreements (PPAs)

  Recently introduced legislation covering the leasing of plant machinery is likely also to impact on long term power purchase agreements, if they are deemed to constitute long funding leases for tax purposes. Unless companies can gain certainty over the application of these new tax rules, which act effectively to transfer tax allowances between parties to the PPA, then construction of new CCGTs where PPAs are required will be hindered.

Additional measures for major technology development

  In light of the particular commercial risk attaching to early stage major plant investments which are dependent on long-term CO2 prices for a return, we raise the possibility of a targeted relief which produced tax credits equal in value to the full cost of any such abortive expenditure. This would go further than our generally stated objective above, but would be one way to mitigate the higher risks, unless some other method of reimbursement was available in the event of losses attributable to EU or Government intervention. A mechanism to deliver this could perhaps be based on a suitably modified and enhanced version of the current Research & Development tax credits regime. If the design program went ahead to construction, then there could be a claw-back of the enhanced tax relief given.

160   Subsequent to our Energy Review submission, we have noted that the consultation document on Carbon Capture and Storage assumes that there is in fact no bar. We believe the legislative wording could usefully be clarified to confirm this more positive stance. Back

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