Over the last decade, many organisations and businesses have invested in assets to generate their own electricity. There are sound reasons for doing so including environmental ones where new generating plants are both more efficient and more able to reduce an organisation’s carbon footprint. To encourage investment there are a number of government initiatives to support self-generation (many of which have evolved over time), and there are various tax incentives designed to make both the initial investment and the subsequent operation of low carbon generating assets more cost-effective.
When it comes to the tax incentives, however, these have become complicated, and operators are finding themselves exposed to historic tax liabilities because of these convoluted reliefs and because their use of the assets has changed. The following example of a Combined Heat and Power (‘CHP’) station illustrates this.
Combined Heat and Power (‘CHP’)
CHP technology provides an efficient method of generation for small and middle capacity consumers and has widely been installed in manufacturing and public sectors. The tax benefits available depend on the efficiency of the CHP so where the station is certified as ‘good quality’ under the official CHPQA (CHP Quality Assurance) programme, it can attract capital allowances relief on build costs and Climate Change Levy (‘CCL’) exemption for both the fuel used to generate electricity and the output electricity generated by the CHP. If the CHP has a reduced efficiency rating, then the level of CCL relief is scaled back to reflect this.
CHPQA status must be retained for CCL exemptions to continue to be available, but as this status requires regular, detailed reporting to the CHPQA programme, it is not uncommon for operators to allow their CHP to fall out of CHPQA, or allow the annual required submissions of performance to lapse.
The impact this has on CCL may include (depending on the generating capacity of the CHP):
- CCL relief for input fuel may no longer be available, and;
- CCL exemption for output electricity may end.
And in any case, there will remain an obligation for the operator to identify and account for the Carbon Price Support (‘CPS’) rate of CCL on fossil fuels used in a CHP to generate electricity (often overlooked).
Responsibility for CCL, including the CPS/CCL, rests with the operator of the CHP. Any changes to the level of CCL relief or exemption applicable to both input fuels and generated electricity must be managed by the operator and, where the level of CCL relief for input fuel changes, the operator must notify the change to the utility supplier through a prescriptive certification process.
Our recent experience is that operators are either failing to identify changes to CCL liability requirements or have not accurately identified the scale of relief and exemption that ought to have been applied from the very beginning – in either case, operators have faced corrective action from HMRC including discussions about potential penalties for lack of reasonable care.
What to do?
Environmental taxation is under the spotlight currently – for obvious reasons – and while this kind of taxation is designed to encourage good environmental investment and behaviour, it also has a role in collecting revenue for HM Treasury like any other form of taxation. It is therefore important and timely to review the environmental tax requirements (CCL in particular) of any electricity generating activity to make sure that all the necessary regulatory requirements are met, that tax liabilities are fully identified, and that the processes required to receive reliefs and exemptions have been followed properly.
How Xeinadin Group can help
Drawing on our detailed knowledge and experience of environmental taxation including carbon taxes in the energy generation and supply industries, Xeinadin Group can:
- Advise energy generators and consumers generally on the environmental tax implications of their operations or planned investments in generating activities;
- Help operators to manage their obligations here including assistance with HMRC disputes, and;
- Review current generating activities to identify potential risks and opportunities for increased tax relief.
Get in touch with an expert
For a discussion about how we can help with your particular activities please contact us!