As reported in our Newsletter of 15 March, the increase in the rate of Energy Profits Levy (‘EPL’) to 35% is accompanied by a new decarbonisation allowance to reduce profits charged to EPL.
The allowance will be generated at a rate of 80% of the qualifying expenditure as opposed to the 29% rate that applies to other investment expenditure and the Finance Bill contains the draft legislation.
In all cases the expenditure that generates the allowance must be capital in nature. There must be a main purpose of reducing the emissions of greenhouse gases.
The expenditure that qualifies is then restricted to that which falls broadly into one of two categories:
- Expenditure on equipment aimed at supplying facilities used in the ring fence trade with electrical power from the grid or power generated from a non-fossil fuel source.
- Expenditure on equipment aimed at reducing the flaring or venting of greenhouse gases, capturing such gases or monitoring such emissions.
Given the uncertainty on the application of the ‘main purpose’ test CW Energy approached HMRC and have received confirmation that the test can be met for both new and existing field developments.
The allowance is potentially valuable but applying the tests to particular expenditure can be challenging. We understand that HMRC intend to share draft guidance on the new relief in due course.
Whilst it is possible that the Bill’s wording will change, CW Energy can offer clients an early indication of their entitlement to the decarbonisation allowance.