Executive summary

The UK's Electricity Generator Levy (EGL) will apply from 1 January 2023 to the exceptional element of revenue arising from electricity generated by qualifying companies or groups of companies in periods from that date. The levy will cease on 31 March 2028.

On 20 December 2022, HM Treasury published a supplemental technical note, replacing the technical note published on 17 November 2022 (see EY Global Tax Alert). The updated technical note was accompanied by draft legislation. The UK Government intends to introduce the legislation as part of the next Finance Bill (expected late March 2023). The UK Tax Authority (HMRC) will also issue draft guidance for taxpayers in early 2023.

Some of the key updates include:

• Reduction of the generation threshold from 100GWh to 50GWh and indexation of the benchmark price
• The method and criteria for recognition of a limited set of exceptional costs which can be set against generation receipts
• More details on list of revenue and cost items and how these will be treated
• The definition and treatment of groups and joint ventures

Taxpayers with questions about HMRC's expectations of taxpayers or any observations about the draft legislation can contact HMRC at egl@hmrc.gov.uk. The technical note itself requests views on how the policy is being delivered in a small number of identified areas such as the special rules for qualifying joint ventures (JVs).

Detailed discussion

Updated detail of the proposed Electricity Generator Levy

In scope groups or companies

• The EGL will apply to corporate groups, or, where relevant, standalone companies, that undertake electricity generation in the UK and are either connected to a national grid or connected to local distribution networks. See below for more detail on definition of group.
• The EGL will be applied to groups generating electricity from nuclear, renewable (including biomass) sources and energy from waste. The EGL will not apply to gas, coal or oil generation or to revenues from storage including battery technologies, pumped hydroelectric storage, hydrogen storage or to grid stabilization.
• The EGL will not apply to electricity generated and used under a private wire arrangement or "behind the meter" generation (i.e., generation for self-consumption).
• The EGL will be limited, through a de minimis threshold, to those groups generating more than 50 Gigawatt-hours (GWh) per annum of electricity from in scope generation assets in a qualifying period (reduced from 100 GWh as outlined in the original technical note).
• The EGL will apply to revenue from grid-related electricity generated in the UK both sold in the UK and exported. Generation in the UK is defined as generation in the UK, in its territorial sea, and in Renewable Energy Zones. The EGL will not apply to electricity generated outside of the UK and imported.

The EGL

• In scope groups will be subject to a 45% tax charge on a measure of "Exceptional Generation Receipts."
• Exceptional Generation Receipts calculated as: Generation Receipts — Electricity Generation x Benchmark Price — Allowable costs — Allowance.
• Where:
• Generation Receipts are the total receipts of a group from in scope UK electricity generation.
• Electricity Generation means electricity generated in the UK from in scope generation in Megawatt-hours (MWh).
• The Benchmark Price is set at £75 per MWh until April 2024. This benchmark price will now be indexed to CPI. This single benchmark price will apply to all taxpayers and all electricity generation models covered by the EGL.
• Allowable costs are a limited set of exceptional costs including generation fuels, certain revenue sharing arrangements and the cost of buying back electricity from the grid to replace contracted output.
• An Allowance is set at £10m per annum for the group.
• The calculation will be undertaken at an aggregate level across all in scope generation of the group in respect of a qualifying period. The qualifying period will be aligned to the accounting period of the company responsible for administering the EGL for the group (the responsible company).
• The EGL will not be deductible from profits subject to corporation tax.
• The EGL is to be administered in the same way as corporation tax, i.e., amounts to be returned within the responsible company's corporation tax return and paid in line with the responsible company's normal payment dates for corporation tax (including under the quarterly instalment payments regime where appropriate).

Revenue calculation

• Generation receipts are, in principle, the amounts that a group realizes for its relevant generation output from wholesale third party purchases of that output or, if a generator sells intra-group (not limited to downstream or supply companies), the market value of revenue determined under the UK transfer pricing principles (plus or minus the impact of any associated hedging contracts).
• In determining the amounts realized for the "Wholesale purchase of electricity" the legislation provides that the following amounts are taken into account:
• Amounts received in accordance with a settlement code in connection with accepted offers to increase generation (but not amounts in connection with accepted bids to decrease generation).
• Imbalance charges under such a code.
• Payments and receipts under arrangements whose principal purpose is to act as a hedge of the exposure to changes in the price of electricity.
• This will need to be considered for each individual group but:
• In its simplest form, generation receipts may be revenue made from selling generation output to third parties.
• Where the relevant generation is sold to a downstream electricity supply business or a separate commodity trading business acquiring the output on wholesale terms as part of a standalone energy trading function rather than acting as a market interface, this may be the arm's-length amount paid for the sale of the generation output.
• Generation receipts may be amounts received by companies within the group that own the relevant generation assets if it sells its output on wholesale market terms and there is no further sale of that output by the group into the wholesale market.
• In other cases, consideration of other group companies, whether in the UK or outside of the UK, may be required if those companies act as the interface with the market and/or those companies have responsibility for hedging.
• The measure of revenue used in the calculation will be the revenue received for output from in scope generation in the qualifying period irrespective of when the relevant contracts were entered into. It is anticipated to align closely with the timing of revenue recognition for financial reporting purposes.
• The revenue measure covers revenue from all potential routes to market including purchase power agreements, long forward contracts, and trading within the day-ahead and intra-day markets.
• The measure will not include revenue that renewables generators earn from:
• A Contract for Difference entered into with the Low Carbon Contracts Company Ltd (LCCC)
• The sale of Renewables Obligation Certificates or Renewable Energy Guarantees of Origin
• Balancing market bids
• OfGem regulated FiT generation and export revenues (unless opted to export on commercial terms)
• Payments not in connection with power provided to the grid, such as ancillary services
• Revenue from capacity market payments

Definition of group

• For the purposes of the EGL, a group will consist of the ultimate parent, known as the principal company, its 75% subsidiaries, and the 75% subsidiaries of those subsidiaries. This appears drawn from the definition of a chargeable gains group for UK corporation tax purposes.
• The liability for tax will fall on a single group company known as the lead member, with the other companies in the group jointly and severally liable.
• Groups must nominate the lead member that will be liable for the tax and responsible for its administration and payment. Otherwise, it will be the responsibility of the UK principal company.
• Where a group includes a member company that has at least one significant minority shareholder:
• There will be rules that allow the group to elect for that company to be individually liable for its share of the group's overall EGL liability, i.e., the amount of the group's liability that can reasonably be attributed to the activities of the company.
• For the purposes of this rule, a significant minority shareholder broadly means a person with at least 10% ownership of the company.
• The rules permit the group to make an election such that the company pays the EGL that relates to its output to ensure that the economic cost of the tax falls on the correct shareholders.
• A significant minority shareholder may receive output from the group company and sell that output on. To ensure that the full EGL revenues are captured, any exceptional wholesale receipts over the amount paid for that output will be EGL receipts for the minority shareholder.

Joint ventures

• There is a recognition of the complexity of the rules applying to joint ventures. To respond to these challenges, the EGL includes special rules for joint venture arrangements to ensure the tax applies to a representative measure of exceptional generation receipts, whether realized at the level of the JV or at the level of its members.
• A qualifying JV is defined as a company not owned 75% by a single company, and so does not form part of the group of a shareholder, but which are 75% owned by five or fewer persons.
• Qualifying JVs will be subject to the EGL in their own right on the same basis as other companies or corporate groups. This means that qualifying JVs that operate generation assets with annual output exceeding 50GWh and exceptional generation receipts above £10M revenue allowance, will be subject to the EGL.
• Each material JV member will be attributed a "non-chargeable amount." This "non-chargeable amount" will be the JV members proportionate share of the exceptional generation receipts of the JV which are covered by the JVs £10M revenue allowance. This "non-chargeable amount" will be treated as an addition to exceptional generation receipts of the JV member. This is to ensure that each JV member group only benefits from a single £10M revenue allowance.
• Where material JV members realize amounts from selling output of the JV or hedging output of the JV, those amounts will be treated as additions or reductions to the member's exceptional generation receipts:
• Where a JV member acquires output from the JV and sells that output to third parties at a higher price, the return that the JV member makes from on-selling would be treated as a positive amount of exceptional generation receipts of the JV member.
• Where a JV member hedges the price at which power is sold from the JV to third parties and makes a profit, the return made from the hedge would be treated as a positive amount of exception generation receipts of the JV member.
• Where a JV member hedges the price at which power is sold from the JV to third parties and makes a loss on that hedge, the loss that the JV member makes from that hedge would be treated as a negative amount of exceptional generation receipts of the JV member.

The basic principle is that amounts closely related to the generation output of the JV and would have increased the exceptional generation receipts of the JV had they been taken into account. However, further consideration is required of how accurately that principle is delivered in certain fact patterns.

• Where a JV member realizes a negative amount in respect of its interest in the JV, that negative amount will be treated as a negative amount of exceptional generation receipts for the JV member. If the negative amount is of no benefit to the JV member, consideration is being given to allowing the JV member to surrender the negative amount to the JV, which could then use it to reduce the exceptional generation receipts upon which it is charged. Compensating payments would be neutral for tax purposes. This rule is not covered in the draft legislation and HMRC will engage with taxpayers on how this rule might be structured.
• The issues raised with regard to JVs are also relevant to companies in which there are significant minority shareholders. Similar rules are also envisaged to be introduced to tax or relieve outputs of a company in which the shareholder has a significant minority shareholding.

Exceptional costs

• The measure of extraordinary generation receipts, to which the EGL will be applied, will only take into account certain limited costs.
• Allowable costs are considered to be:
• Exceptional generation fuel costs of the relevant generating stations
• Exceptional revenue sharing costs in respect of relevant generating stations
• Qualifying electricity purchase costs
• Where fuel is used to generate electricity, generators will be able to reduce exceptional generation receipts by a measure of the amount by which generation fuel costs exceed historic levels. Generation fuel costs will be considered to include the costs of acquiring fuel used to generate electricity and the costs of transporting fuel. Acquisition of feedstock will also be considered as a fuel cost.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United Kingdom)

• Calum Black, Edinburgh | Calum.J.Black@uk.ey.com
• Iain Wintour, Edinburgh | iwintour@uk.ey.com
• Andrew Ogram, London | aogram@uk.ey.com
• Graham Wright, Manchester | gwright1@uk.ey.com
• Robert Hodges, London | rhodges@uk.ey.com
• Gillian Bolling, Glasgow | gbolling@uk.ey.com