UK government plans to revamp holiday pay calculation for part-year workers
Out-Law News | 17 Nov 2022 | 3:42 pm | 5 min. read
The introduction of a new electricity generator levy in the UK could curb investment in new renewable energy projects, experts have warned.
Ian McCarlie, Ronan Lambe and Jake Landman of Pinsent Masons were commenting after UK chancellor Jeremy Hunt confirmed in his autumn statement on Thursday that the levy – a 45% tax on the “extraordinary returns” of low-carbon electricity generators – will be introduced from the beginning of next year.
The tax … could adversely impact plans for new renewables projects and stifle innovation
The Treasury said electricity generators, such as those generating electricity from nuclear and renewables sources, have realised extraordinary returns because they have been able to sell their energy at a price that reflects the cost of wholesale gas, and not the lower costs entailed with their operations.
The Treasury has confirmed that the levy will be legislated for in the next Finance Bill, with draft legislation to be published in mid-December, and will apply to extraordinary returns arising from 1 January 2023. The levy will be legislated to end by 31 March 2028, it said.
According to the Treasury, for tax purposes, ‘extraordinary returns’ will be defined “as the aggregate revenue that generators make in a period from in-scope generation at an average output price above £75/MWh” and that the tax will be limited to generators whose in-scope generation output exceeds 100GWh across a period and will only then apply to extraordinary returns exceeding £10 million. Further detail is outlined in a technical note.
It is not yet clear how ‘in-scope generation’ will be defined, but the technical note suggests it will cover electricity generation from nuclear, renewable and biomass sources in the UK that are connected to national grid or local networks. No specific tax reliefs are referenced in the documents published alongside the autumn statement.
Energy projects specialist Ian McCarlie said: “While the government is at pains to say that the levy ‘is not expected to harm long term investment’, investors in renewable energy projects will need to carefully review their investments in light of the announcement. The tax, which is unprecedented in the UK renewables sector, could adversely impact plans for new renewables projects and stifle innovation.”
“The impact of the announcement is broad reaching, impacting utilities, pension funds and specialist infrastructure funds that have invested heavily in UK renewables generation and would be the same type of investor that the government would look to going forward to increase delivery of renewable energy capacity. Each of these investors will need to consider the impact of the new windfall tax on their earnings and future investment plans,” he said.
Ronan Lambe, who also specialises in energy projects, added: “New renewable projects require investors to take a long-term view on investment with assets having a typical operational life of 25 or 30 years, or even longer. Investors therefore seek stable markets with consistent policy, regulation and tax regimes which are likely to provide the best chance of obtaining a fair return on their investments.”
“The timing of this announcement, coming shortly after the new prime minister’s suggestion that he will retain a ban on onshore wind development and against the backdrop of potential seismic changes to UK electricity market arrangements contemplated by the recently closed Review of Electricity Market Arrangements (REMA) consultation, adds further uncertainty at a time when deployment of new low carbon generation is more important than ever,” he said.
Both McCarlie and Lambe questioned whether the levy aligns with broader UK energy policy.
Introducing a windfall tax on renewable energy generation profits sends muddled signals to investors at a time when the government wants to see a step change of investment in low carbon generation
McCarlie said: “The UK government faces a challenge in managing the energy trilemma – keeping the lights on, decarbonising the UK economy and minimising the cost of energy to consumers amidst the cost-of-living crisis. It’s a fine balance and increasing taxation on investors in the long term could disrupt future investment in the UKs energy infrastructure and at worst lead to a flight of capital to other international markets.”
Lambe said: “The government is aiming to decarbonise the power market in the UK by 2035. Introducing a windfall tax on renewable energy generation profits sends muddled signals to investors at a time when the government wants to see a step change of investment in low carbon generation.”
One of the issues that electricity generators will be seeking clarification on is whether equivalent tax reliefs to those under the existing energy profits levy on oil and gas producers will be applied in respect of the new electricity generator levy.
In his autumn statement, Jeremy Hunt confirmed that the headline rate of tax that the energy profits levy imposes will rise to 35% from 25% from the beginning of 2023 and that, like the electricity generator levy, would be extended to 2028. He also confirmed changes to the investment allowances regime that exists under the energy profits levy – this is designed to incentivise oil and gas producers to reinvest their profits into initiatives that support net zero, domestic jobs and UK energy security.
The extension of the levy to 2028 and the increase in the tax rate to 35% from 1 January 2023 will bring with it additional complexity regarding apportionment and may lead to disputes with HMRC
Tax expert Jake Landman said: “The existing oil and gas energy profits levy provides a generous additional relief for 80% of investment expenditure. Because it applies on top of other existing reliefs, such as enhanced capital allowances, it means that up to £91.25 of every £100 of qualifying expenditure is treated as a deductible in calculating the company’s profits for the purposes of the levy.”
Under the revised investment allowances regime for the energy profits levy, the 80% rate of relief is only being maintained for “decarbonisation expenditure”. The government said this would include expenditure on “modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power the installation or running electricity cables to the installation from shore”. Landman said this will result in an overall deduction of more than 100% on that expenditure. The investment allowances rate will otherwise be cut to 29%.
Landman said: While these reliefs are very welcome in the industry and encourage further investment, there are already some difficulties foreseen in terms of applying the levy, including apportionment. As energy projects are long, there is a need to allocate the expenditure to the periods covered by the levy which can be complicated. The extension of the levy to 2028 and the increase in the tax rate to 35% from 1 January 2023 will bring with it additional complexity regarding apportionment and may lead to disputes with HMRC. However, the confirmation that this arrangement is fixed until 2028, i.e. that the government will not consider phasing it out earlier, will reduce some of the uncertainty for businesses.”
There has been no confirmation by the government whether the investment allowances regime for the energy profits levy will be replicated in respect of the electricity generator levy, though it has said generators will be able to “write off their investments against corporation tax by deducting their investment spending from their profit”.
McCarlie said: “Renewables investors would have been seeking a similar reliefs regime associated with the electricity generator levy. It is really important that government encourages investment in innovation and new technologies such as carbon capture, which have been identified as pivotal if the UK’s net zero targets are to be met.”
Lambe said that businesses that invest in on-site renewable energy generation will have welcomed the detail in the technical note that the levy will apply to electricity generation which is connected to the transmission or distribution systems.
He said: “An increasing number of businesses are seeking to install on-site renewable generation assets in order to reduce costs while making a tangible sustainable purchasing choice. Those businesses often sell excess energy generated back to the grid. There is an ongoing debate over whether, and the extent to which, these businesses operating in the so-called ‘behind-the-meter’ market should contribute to the costs of operating the wider electricity system. The economics of such projects are typically reasonably healthy as a result of avoiding such costs, and the apparent application of the levy only to those assets which are connected to the transmission or distribution systems is a welcome clarification.”
UK government plans to revamp holiday pay calculation for part-year workers