Capital allowances "loophole" for energy distribution companies to be closed

It has published draft legislation which confirms that the tax rules prevent businesses from claiming capital allowances for costs met by other businesses. The legislation will be included in the Finance Bill, which is currently before Parliament.

"Utility companies incur significant capital expenditure, and it is right that they are entitled to tax allowances for the money they spend," said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com.

"However, there is a long-standing rule that contributions are generally deducted from qualifying expenditure, and it is surprising that a possible loophole has only recently emerged," she said.

According to a Treasury announcement, the new rules are intended to prevent utility companies from making new claims for historic costs that have already been paid by their business customers. The change was prompted by some companies beginning to make these claims, which could cost the Exchequer up to £900 million in lost tax and result in large 'windfall' repayments to the companies concerned if successful, it said.

The legislation will amend the Capital Allowances Act to confirm that allowances are only payable in respect of plant or machinery for business use that is in the hands of the party applying for the allowance and which that party has covered the cost of. It will mean that utility companies will not be able to claim against the installation or improvement of equipment installed in business premises or property developments where the customer met part of all of the costs.

The change will apply to capital allowances claims made on or after 29 May 2013 by the recipient of a contribution towards these costs, as well as to expenditure pooled previously in certain circumstances. It will only apply in relation to future contributions by businesses making such a contribution.

Utility companies had not previously attempted to claim capital allowances for these costs, the Treasury said. However, some companies had begun using complex legal arguments to challenge this.

"The Government is committed to competitive taxes to support growth in the UK, but it is also only right that companies pay the tax they owe," said Chancellor of the Exchequer George Osborne. "It is completely unacceptable that utility companies think they can claim for huge amounts of money, that business customers have already covered the cost for."

HMRC would be "robust" in challenging any claims that had already been submitted, the Government said.