Budget 2016: tax changes in the renewables and energy efficiency sector

After a year of cuts to subsidies and tax incentives, last week’s Budget saw further tax developments for businesses in the renewables and energy efficiency sector.

CRC abolished…

As expected and following the September 2015 consultation, the Budget has kicked-off the process of reforming the UK’s business energy taxes. The Carbon Reduction Commitment – described by the Treasury as “bureaucratic and burdensome” – will (as many expected) be abolished. The loss of revenue from this is compensated for by an uplift in the main Climate Change Levy (CCL) rates. Both of these changes will take effect from April 2019, although the CCL rates will also increase in line with RPI in 2017 and 2018.

…and CCL to be reformed

The government will also be rebalancing CCL rates for different fuel types and increasing discounts in certain cases for sectors with climate change agreements. It will also begin a further consultation on introducing a simplified energy and carbon reporting regime, with the intention of that also coming into force in April 2019. However, it is worth noting that there has been no change in the government’s proposal to abolish the exemption from CCL for renewably-sourced electricity.

Enhanced capital allowances

The Budget also includes an update to the list of energy-saving items qualifying for enhanced capital allowances. However, the proposals are very limited and there is no change to the rates or approach of capital allowances more generally for the sector.

Business rates

Elsewhere, the Government announced significant changes to business rates. They are to be cut from 1 April 2017 and the system reformed, with small business rate relief being more widely available. This should mitigate the effect for businesses in these sectors of the upcoming 2017 revaluations, read more about them here. 

Interest deductibility limited

Finally, those projects who are anticipating a specific level of tax deduction for payments of interest may be adversely impacted by the changes to interest deductibility. The government has confirmed that it will be introducing new rules around corporate interest deduction, including a fixed ratio rule limiting corporation tax deductions for net interest expense to 30% of a group’s UK EBITDA, and a group ratio rule. These changes implement the proposals recommend by the OECD as a result of its work on Base Erosion and Profit Shifting and will come into force in April 2017. The full detail of this remains unclear for now, including the scope of a possible public benefit exemption, and will be consulted on later in the year, but the impact on existing and new projects will need to be carefully considered.

We will continue to monitor this and other tax developments in the sector in the coming months.