Draft legislation for the Electricity Generator Levy (EGL) was published on 20 December 2022 for inclusion in the Spring Finance Bill. It was published alongside a new “supplementary technical note”, intended to help generators prepare for the EGL. The technical note, does not, however, constitute formal guidance; HMRC plans to issue draft guidance in early 2023.
EGL announcement and changes since then
UK Chancellor Jeremy Hunt had announced the EGL in the Autumn Statement as a temporary tax (with an end date of 31 March 2028, aligning it with the extended end date for the Energy (Oil and Gas) Profits Levy as provided for in the Autumn Finance Bill). The EGL would be charged at a rate of 45% on returns from low-carbon UK electricity generation at an average output price above £75/MWh. Generators would be subject to the EGL only if their in-scope generation output exceeded 100GWh per annum and exceeded an allowance of £10 million per annum.
In the draft legislation, the output threshold has been reduced to 50GWH and the £75/MWh benchmark price is set only until April 2024. For later financial years, the benchmark will be adjusted in line with changes to the Consumer Prices Index. The new benchmark is to be published by HMRC “in such manner as they consider appropriate” before the start of the relevant financial year. The rate and allowance amount have remained unchanged.
What generation is in scope?
The EGL applies only in respect of stations generating electricity in a “relevant place”, meaning the UK, its territorial sea and any Renewable Energy Zone, but it applies whether or not the electricity is consumed in the UK or exported.
It does not apply in respect of pumped hydro power plants or stations generating electricity mainly through burning of oil, coal or natural gas. The latter is clearly not the sort of low-carbon electricity generation that was intended to be caught; presumably, the former had to be excluded to avoid double counting the generation activities. To my mind, pumped hydro power plants are more akin to a storage facility, and the EGL does not apply to revenues from storage; generators will need to split revenues from hybrid assets between generation and storage.
To the extent that stations are covered by a Contract for Difference (or certain other arrangements listed in the legislation), the EGL is also inapplicable.
Generation (measured in MWh) is first attributed to qualifying generation undertakings (see below) and, on that basis, their generation receipts subject to the EGL are determined. Generation receipts are the “amounts that it is fair and reasonable to attribute to [the attributed] generation…on the basis that the amounts reflect, directly or indirectly, the amount realised (or to be realised) for the wholesale purchase of electricity arising from that generation (whether or not the electricity is actually generated).” What can (or cannot) be fairly and reasonably attributed may be further specified by Treasury regulation.
HMRC anticipates that “the receipts for output of a period will generally align closely with the amounts recognised for financial reporting purposes. However, it is possible that the measure of receipts could include revenues that are received or recognised for financial reporting purposes in a different period – for instance, if payments already received for generation output in 2023 have been recognised as revenue in 2022.” It is also worth noting that, in the case of intra-group transactions, transfer pricing concepts are imported from the Taxation (International and Other Provisions) Act 2010.
Charged on a group-basis
The EGL applies to “qualifying generating undertakings”. The qualification criterion is generation in excess of the 50GWh threshold. “Generating undertakings” are the operators of in-scope generating stations: if the operator is a standalone company, the “generating undertaking” is that company, but if it is a member of a group, the “generating undertaking” is the group.
Where the EGL applies to a group, the periods by reference to which the EGL is charged are determined by reference to the corporation tax accounting periods of the group’s lead member, meaning a company nominated for these purposes or otherwise determined according to the default rules set out in the legislation. All group members would be jointly and severally liable for the EGL, but the lead member would have the option to elect that any EGL attributable to a group member with a significant minority shareholder (meaning at least 10%) must be paid by that member.
Special rules apply to certain joint ventures conducted through a corporate entity. The technical note indicates that the draft legislation here is incomplete, with some aspects of the rules still being under consideration. Broadly, the EGL applies at the level of the JV in the normal way, but JV members with an interest of 10% or more (which are deemed to be generators for the purposes of EGL, whatever their own activities may be) would be allocated their proportionate share of the generation receipts sheltered by the £10 million allowance at the level of the JV.
Where JV members sell or hedge output of the JV, a proportion of the JV’s generation may also be attributed them, resulting in the attribution of additional generation receipts to the JV members. These additional receipts could be positive, thus increasing the JV members’ EGL liability, or negative. If a JV member does not otherwise have generation receipts, negative receipts attributed to it would not be effectively relieved under the proposal as it currently stands, but “the government is considering a rule that would allow the JV member to surrender the negative amount to the JV”.
As already mentioned, HMRC plans to issue draft guidance in early 2023. The EGL will be introduced with effect from 1 January 2023; the legislation will be passed as part of the Spring Finance Bill which is likely to be published around the Spring Budget scheduled for 15 March 2023.