EGL63200 - Surrender of shortfall amounts: the surrender mechanism
F(2)A23/S298 provides a mechanism for the transfer of shortfall amounts between related generating undertakings. This applies in cases where there is:
- a participant in a qualifying joint venture (JV) undertaking, and
- a significant minority shareholder in a company that is a member of a group generating undertaking.
These are described as “related undertakings” in the legislation and the term “relevant shareholder” is used to describe either a participant or significant minority shareholder.
A shortfall amount arises where an undertaking’s generation receipts are below the amount that would be considered exceptional for EGL purposes of the levy. For example, where the receipts are, on average, below the benchmark price, or where the costs exceed the amount of receipts. The surrender mechanism ensures that, as far as possible, where generation is attributed to both undertakings, any shortfall arising to one undertaking in respect of that generation can be set off against exceptional generation receipts of the other related undertaking.
Overlap period
Where the qualifying periods of related undertakings do not coincide, the amounts are calculated by reference to the “overlap period”, F(2)A23/S298(8). For example: a joint venture company’s qualifying periods end on 31 December and that of a participant ends on 30 June (both based on Corporation Tax accounting periods). Shortfall amounts for these companies would be calculated by reference to six-month periods ending on 30 June and 31 December.
F(2)A23/S298(2) & (3) explain how to determine whether one of the related undertakings has a shortfall amount. This involves making the calculation set out in F(2)A23/S279(5) for each company’s overlap period, taking into account all six steps in the calculation, ignoring where the steps would normally end once they result in a negative figure. If at the end of all six steps there is a negative amount, then that is the amount of the shortfall.
Example
The operation of this rule can be illustrated by a simple example. Assume X and Y each hold a 50% interest in a joint venture company Z. X and Z have the same accounting period meaning an overlap period of a full 12 months.
In the period, Z sells its generation of 1,000 GWh to third parties and achieves an average price of £200 per MWh and is therefore liable to the EGL.
Receipts £200,000,000
Benchmark deduction (£75,000,000)
Allowance (£10,000,000)
__________________
Net receipts £115,000,000
EGL @ 45% £51,750,000
X has no other interests in generation but has entered into a hedging arrangement based on 500 GWh of generation at a market price if £160 per MWh, a loss of £40 per MWh.
Share of Z’s receipts £5,000,000
Hedging loss (£20,000,000)
Allowance (£10,000,000)
__________________
Shortfall (£25,000,000)
However, this calculation is used to arrive at an undertaking’s total shortfall amount for a period which is not necessarily the amount that may be surrendered. That amount is restricted to take into account the extent to which it arises in relation to generation in which the related undertakings each have an interest. That figure is determined by making the calculation under F(2)A23/S299, see EGL63300.