EGL63300 - Surrender of shortfall amounts: calculation

The EGL legislation provides a mechanism, in certain cases, for a shortfall arising in one undertaking to be surrendered to a related undertaking in respect of an overlap period. The basic framework is explained at EGL63200, which also sets out the meaning of related undertaking, relevant shareholder and overlap period.

This is subject, however, to F(2)A23/S299 which limits the shortfall amount that can be surrendered to a related undertaking to take into account the extent to which it arises in relation to generation in which the related undertakings each have an interest.

Limitations

The legislation deals with ‘downward’ and ‘upward’ surrenders separately:

  • F(2)A23/S299(1) to (3) deal with surrenders of amounts by a generating undertaking A to another B where A is a relevant shareholder in B (downward surrenders).
  • F(2)A23/S299(4) to (6) deal with surrenders of amounts by a generating undertaking C to another D, where D is a relevant shareholder in C (upward surrenders).

In each case the amount that can be surrendered is limited to the lower of:

  • the amount of the shortfall being surrendered that relates to the relevant shareholder’s interest in the generation of the related undertaking
  • the amount of the exceptional receipts against which the surrender is being used that relates to the relevant shareholder’s interest of the generation of the related undertaking

In addition, F(2)A23/S299(7) then places an overall limit on the amount that can be surrendered by a generating undertaking for an overlap period to ensure that where there is more than one surrender for an overlap period the total surrendered cannot exceed the shortfall amount for that period.

F(2)A23/S299(8) explains that the effect of a surrender is to reduce the claimant’s exceptional receipts as calculated after Step 5 of F(2)A23/S279(5) for the claimant undertaking’s qualifying period in which the overlap period falls but not so as to reduce the claimant’s exceptional generation receipts to below nil. In other words: it cannot create a shortfall for the claimant undertaking.

F(2)A23/S299(9) provides that amounts are to be surrendered and claimed in accordance with F(2)A23/S305.

Example (continued)

Applying this rule to the example in EGL63200 –

The amount of X’s shortfall of £25,000,000 that can be surrendered to Z is then restricted to the lowest of:

  • £20,000,000 under F(2)A23/S299(2) (being the amount of the shortfall that directly relates to X’s share of the generation of Z)
  • £62,500,000 under F(2)A23/S299(3) (being the amount of the exceptional receipts of Z that directly relates to X’s share of the generation of Z)
  • £25,000,000 under F(2)A23/S299(7) (being the total shortfall amount of X that relates to the overlap period, taking account of any other surrenders)
  • £115,000,000 under F(2)A23/S299(8) (while this is not a formal limit, there would be no value in Z claiming more than its total exceptional receipts)

As a result, X can surrender £20,000,000 to Z.

A surrender of this amount reduces Z’s net exceptional receipts to £95,000,000 resulting in an EGL liability of £42,750,000.

Further guidance

EGL63200 for an explanation of the basic mechanism and the meaning of the terms ‘related undertaking’, ‘relevant shareholder’ and ‘overlap period’.

EGL61500 extends the above example for surrenders in respect of qualifying joint ventures

EGL62400 sets out additional examples for surrenders in respect of significant minority shareholders

EGL63400 explains the procedure for claiming shortfall amounts and giving consent to their surrender as provided in F(2)A23/S305.