The UK government has published further details of the new electricity generator levy (or ‘EGL’), together with draft legislation to be included in Finance Bill 2023. The legislation and accompanying explanatory notes together with the revised technical note provide clarification as to the application of the levy, but also include important changes in its scope and calculation. This article briefly summarises the key points of clarification and changes from the original November announcement (as described in our previous article.
Reminder: scope of the EGL
The levy will be charged at a 45% rate on ‘exceptional generation receipts’ arising from in-scope generation, broadly being that from nuclear, renewable and biomass sources. For companies within a corporate group, its will be charged by reference to generation and receipts on a group-wide basis.
Meaning of ‘group’
One of the key questions following the announcement had been what would constitute a group for levy purposes. The draft legislation confirms that a group will be comprised of a principal company and the 75% subsidiaries of that company. This is, though, subject to specific treatment for joint ventures and companies with significant minority shareholders as set out below.
Reduction of de minimis threshold
The application of the levy to a particular standalone company or group is subject to a de minimis level of generation, to avoid imposing an additional administrative burden on smaller generators. This threshold has though been reduced from being 100 GWh annually (as originally announced last month) to 50 GWh annually.
The rationale given for this change is to reduce the risk of generators exceeding the £10m allowance on 100 GWh of generation, due to concerns that this could create disincentives to generate around the threshold. It will inevitably increase the number of companies and groups to which the levy applies.
Calculation of the levy: indexation and allowable costs
The calculation of the levy remains broadly as set out in our previous article. It involves identifying the aggregate receipts from in-scope generation, before deducting an amount equal to the level of generation multiplied by a benchmark price of £75 per MWh, thereby isolating the ‘exceptional’ revenues at which the levy is aimed. An annual allowance of £10m is then available to reduce the amount subject to the 45% rate.
The legislation now also provides for specific ‘exceptional costs’ that can be deducted from this calculation. These broadly include increased costs of generation fuels, revenue sharing for access to sites such as landfill, and the costs of buying back electricity from the grid to replace contracted output that was not generated.
A further change from the previous announcement is the indexation of the benchmark price. While it will be fixed at £75/MWh until April 2024, it will then be adjusted annually by reference to changes in the Consumer Price Index for the preceding year (mitigating the effect of fiscal drag between that date and 2028).
The draft legislation also contains both general and specific provisions regarding the identification of generation receipts. These are intended to be amounts realised by a group or company from the sale of wholesale electricity: but it is clear that this will require detailed review, particularly in the context of groups with integrated supply or trading business.
The original announcement noted that there would be specific provisions dealing with joint ventures, and the nature of these has now been clarified (with the caveat that this particular area may be subject to further consideration). The provisions will relate to a qualifying joint venture, broadly being a company (or group) that is not at least 75% owned by a single shareholder, but is at least 75% owned by five or fewer persons.
Such joint ventures will be subject to EGL – and entitled to the £10m annual allowance – on the same basis as other groups. In addition, each member of the joint venture that holds at least a 10% interest will be attributed their pro rata share of the receipts covered by the allowance used by the joint venture; the aim being to avoid the members benefiting from the use of allowances across several joint ventures. In addition, members of a joint venture that realise amounts from selling output of the joint venture or hedging its output will be subject to the EGL in respect of these amounts (notwithstanding the electricity has not been generated in their group).
There are related points identified in the technical note as still being under consideration, such as the ability to surrender losses realised at member level to the joint venture, and the identification of receipts that should properly be taxed at member level. It is also noted that it has been considered whether it may be possible to treated qualifying joint ventures as transparent, but it appears this is unlikely to be adopted.
Significant minority shareholders
In addition to the above, there will be specific provision for companies within a group that have at least one significant minority shareholder (which broadly requires at least 10% ownership). Where this is the case, the group is to be able to elect to allocate a specific proportion of its overall EGL liability to that company, with the aim of ensuring that the relevant minority shareholder economically bears a level of EGL reflective the position of the relevant company. Significant minority shareholders that receive output from the company in question will also be subject to the EGL on any related exceptional wholesale receipts, in a similar manner as described above in relation to joint venture members.
We will continue to work through the legislation and accompanying documentation in detail, but if you have any questions or it would be helpful to discuss this new tax, please do get in touch with us or your usual CMS contacts.