EGL24400 - Allowable costs: exceptional revenue sharing costs, qualifying arrangements

F(2)A23/S285 allows a generating undertaking to make a deduction from its receipts where it incurs “exceptional revenue sharing costs”. Broadly, these are the costs incurred as a result of an arrangement with a third party that provides fuel for generation and payment is made based on the either the actual price received for the generated electricity or on the wholesale market price of electricity.

Only arrangements that provide the undertaking with, or access to, fuel for generation qualify for the deduction, F(2)A23/S285(2). The term “generation fuel” is considered broad enough to include material that is not used directly for the production of electricity, referred to a feedstock. For example, food or agricultural waste may be subjected to an anaerobic digestion process to produce biogas that is then used to generate electricity.

Arrangements within the scope of this rule are often found in the energy from waste sector. For example, a Local Authority or its service provider, for example a commercial landfill operator, may send certain waste streams to a generator that will use the waste as fuel. The waste is incinerated with the heat used to drive a turbine that produces electricity. The generator may agree to pay a percentage of its revenues from the sale of the electricity at above a specified price as part of the arrangements that it has with the landfill operator or Local Authority for the treatment and disposal of waste.

An expense will have been incurred for the purpose of calculating the amount of the allowance if either the generating undertaking makes a payment to the third party, often a Local Authority, under the revenue sharing agreement, or a deduction for that share is made from amounts that would otherwise be due to the generating undertaking under that same agreement. This may be the case where the agreement covers waste collection and/or processing services for which the undertaking is due a fee.

This rule does not apply to arrangements where the amount paid to the third party is reduced to take account of the EGL payable by the generation undertaking, unless that reduction is calculated by reference to a fixed proportion of the undertaking’s levy liability. In such a case the allowable cost in respect of the revenue share is restricted by reference to the proportion of the levy that the generator bears. See the example below.

For the purpose of this rule an arrangement is with a third party if it is with a person who is not a “significant equity holder” in the generating undertaking, meaning a person or a group of companies (taking its members together) that holds an interest of 20% or more in the generating undertaking, or in any company that is a member of a group that is a generating undertaking.

The 20% interest threshold may be met by applying any of the following measures –

• entitlement to 20% or more of a company’s profits available for distribution to equity holders;
• entitlement to 20% or more of a company’s assets available for distribution to equity holders on a winding up; or
• ownership of 20% or more of the company’s ordinary share capital.

EGL76000 explains how the corporation tax group relief rules apply when measuring these amounts.