The UK government had put forward a new clause and schedule for consideration at report stage on 2 February 2022 to introduce a new tax: the public interest business protection tax.
The new tax aims to counter the risk of companies which hold assets on which energy supply businesses rely taking the profits from those assets for themselves, resulting in energy suppliers becoming insolvent with the government left to pick up the cost of ensuring continuity of energy supply. This could, for example, be an attractive option for remaining energy supply businesses which are seeking to exit the energy supply market.
The new tax will have effect where steps are taken to obtain value from assets which materially contribute to the energy supply business entering into special measures on or after 28 January 2022 and before 28 January 2023. The tax will be charged at 75% of the adjusted value of the assets, and a £100m asset value threshold will apply below which the tax will not apply.
The problem that this tax seeks to address is a result of energy companies hedging against fluctuations in the energy market price, by using forward purchase agreements to buy energy in the future at a price fixed at the time the contract is entered into. As the wholesale cost of gas and electricity has increased steeply in recent months, some companies now hold valuable assets as a result and the opportunity to buy energy at the lower fixed price. This creates a risk that companies might decide to distribute the value of the assets to their investors rather than using the assets for the benefit of energy supply. In such a scenario, the energy supply business would likely become insolvent, leaving the government to pick up the cost of ensuring continuity of energy supply.
Colin Smith, partner and energy tax specialist at PwC, said the new tax was a response to the recent collapses of some energy supply businesses. ‘Specifically, it is designed to prevent energy supply business owners taking for themselves the benefit of the business’s assets and therefore contributing to that business collapsing', Smith said. 'An example could be if an energy supply business was to realise commodity hedging gains and distribute those gains to its investors rather than using them to offset the losses of the business itself, as a result of which the business fails.’
Alongside the proposed new clause and schedule, and the usual explanatory notes, HMRC has published a tax information and impact note and a detailed technical note explaining the policy.
The UK government had put forward a new clause and schedule for consideration at report stage on 2 February 2022 to introduce a new tax: the public interest business protection tax.
The new tax aims to counter the risk of companies which hold assets on which energy supply businesses rely taking the profits from those assets for themselves, resulting in energy suppliers becoming insolvent with the government left to pick up the cost of ensuring continuity of energy supply. This could, for example, be an attractive option for remaining energy supply businesses which are seeking to exit the energy supply market.
The new tax will have effect where steps are taken to obtain value from assets which materially contribute to the energy supply business entering into special measures on or after 28 January 2022 and before 28 January 2023. The tax will be charged at 75% of the adjusted value of the assets, and a £100m asset value threshold will apply below which the tax will not apply.
The problem that this tax seeks to address is a result of energy companies hedging against fluctuations in the energy market price, by using forward purchase agreements to buy energy in the future at a price fixed at the time the contract is entered into. As the wholesale cost of gas and electricity has increased steeply in recent months, some companies now hold valuable assets as a result and the opportunity to buy energy at the lower fixed price. This creates a risk that companies might decide to distribute the value of the assets to their investors rather than using the assets for the benefit of energy supply. In such a scenario, the energy supply business would likely become insolvent, leaving the government to pick up the cost of ensuring continuity of energy supply.
Colin Smith, partner and energy tax specialist at PwC, said the new tax was a response to the recent collapses of some energy supply businesses. ‘Specifically, it is designed to prevent energy supply business owners taking for themselves the benefit of the business’s assets and therefore contributing to that business collapsing', Smith said. 'An example could be if an energy supply business was to realise commodity hedging gains and distribute those gains to its investors rather than using them to offset the losses of the business itself, as a result of which the business fails.’
Alongside the proposed new clause and schedule, and the usual explanatory notes, HMRC has published a tax information and impact note and a detailed technical note explaining the policy.
