The Budget announcements continued themes which have been present in the past Budgets. The focus on delivering the most competitive tax regime of any major economy has led in general to a further cut to headline tax rates and an extension of tax breaks for the creative and knowledge-based industries. In contrast the Power & Utilities sector has not seen any such targeted tax incentive measures, as the Government continues to focus on non-tax measures such as guarantees to help raise finance in support of major infrastructure projects.
Meantime, Power & Utility companies continue to be affected by the Green Taxes which are set to increase further from the Budget announcements. Finally, future changes in the taxation of corporate debt and derivatives are expected which companies in the sector will need to monitor.
Businesses will welcome the further cut in the main rate of Corporation Tax announced by the Chancellor. In addition to the cut to 21% from April 2014 announced last autumn, the main rate will now fall to 20% from April 2015.
However, the effective rate of tax for Power & Utility companies will not necessarily equate to the main rate. The Government has not yet addressed the less-than-full UK tax relief given to significant capital expenditure in many critical infrastructure projects, which arises from the lack of capital allowances available for structures and buildings. This pushes up the effective tax rate for such projects. The UK continues to be out of line with other G20 countries in this regard, and KPMG and several industry bodies such as the CBI and The Infrastructure Forum have called for the tax code to be modernised so as to give effective relief for this expenditure and so help attract investment in such projects. The Government is continuing to consult on this matter.
The last Budget saw several changes announced to the capital allowances regime which affected Power & Utility companies. Budget 2013 has avoided major changes, as the measures announced amount to revisions to the Enhanced Capital Allowances regime. The list of technologies which qualify for Enhanced Capital Allowances will be updated in summer 2013, as it is periodically, to introduce new technologies and retire others. Information as to when the new lists take effect will be placed in the Energy Technology List and Water Technology List section of the gov.uk website.
Legislation will also be introduced to bring the regime in Northern Ireland into line with that in the rest of the UK as regards certain energy-efficient assets. This latter change mirrors the Budget 2012 announcement which affected the UK excluding Northern Ireland, and will prevent Enhanced Capital Allowances from being available on expenditure on plant & machinery which qualifies for the Renewable Heat Incentive, or which qualifies for Feed-in Tariffs (if they were to be introduced in Northern Ireland). This will apply to expenditure incurred from April 2013 or, in the case of Combined Heat and Power equipment, April 2014.
It is Coalition policy to increase the proportion of revenue raised from environmental taxes, and the Red Book states that measures announced in this Budget increase the proportion to 0.8% over this Parliament. Power & Utility companies continue to be affected by measures which target them as a specific policy matter, such as the Carbon Price Floor, and also by some of the other more wide-ranging Green taxes.
2015-16 carbon price support rates will be equivalent to £18.08 per tonne of carbon dioxide. Although an increase in rates was expected, the 2015-2016 costs announced will be almost 4 times higher than the rates to be introduced from April 2013. This will further increase the cost base for electricity sourced from fossil fuels. Further details on the specific rates per fuel will be announced in the Finance Bill 2013.
The Government has confirmed electricity generators in Northern Ireland will be exempt from the carbon price floor from 1 April 2013.
Rates will be announced in Finance Bill 2013 and are expected to increase in line with RPI, adding further costs to the cost base for electricity generated from non-renewable sources.
No major changes are announced to Aggregates Levy, and the rate will remain at £2.00 per tonne in 2013-2014. However, we continue to see that this can remain a hidden cost for operators in this sector who are undertaking large infrastructure projects, and have seen instances where such works could have been covered by existing exemptions. We recommend operators consider whether Aggregates Levy has or will affect their developments, noting the levy may be ‘hidden’ in costs passed on from construction contractors, and whether any works could qualify for relief.
The standard rate of landfill tax will increase from £72 per tonne from 1 April 2013, by £8 per tonne to £80 per tonne from 1 April 2014. This 11% increase will be of interest to waste management companies in general. The lower rate of landfill tax will remain frozen at £2.50 per tonne in 2014-15, with the freeze being welcome to business such as operators of conventional power stations subject to this rate.
The Red Book notes at paragraph 2.111 there will be a review and consultation on a modernisation of the corporate debt tax legislation, with a view to legislating in both Finance Bill 2014 and Finance Bill 2015. All companies will need to monitor the impact of these changes in addition to the impact of the new UK GAAP introduced by FRS 102, which will apply to individual UK company accounts by 2015. In particular, Power & Utility companies will need to identify the impact on their hedging strategies. Companies whose future low-carbon projects may qualify for the Feed-in Tariff with Contract for Difference expected under Electricity Market Reform will also need to look carefully at the impact of these regimes.