OT21710 - Energy Profits Levy: Commencement, cessation and straddling accounting periods

The Energy Profits Levy (EPL) applies to a company’s levy profits for accounting periods beginning on or after 26 May 2022 and ending on or before 31 March 2028. It will not apply to profits for accounting periods beginning after 01 April 2028.

Sections 15 and 16 of EPLA22 provide for the arrangements for accounting periods that straddle the commencement date of 26 May 2022 and the end date of the levy of 31 March 2028. The same apportionment provisions apply for accounting periods that straddle the rate change date of the levy (FA23\S1). The rate of the levy increased from 25% to 35% on 1 January 2023.

Where a company has an accounting period which straddles the commencement or end dates or rate change date of the levy, the periods before and after the start or end or rate change date will be treated as separate accounting periods. This treatment will not create separate accounting periods for corporation tax purposes more generally. This will require companies to apportion their levy profits for the straddling period to the two separate notional accounting periods.

Those profits are to be apportioned by the apportionment of receipts, expenses, assets and liabilities between the two separate accounting periods on a just and reasonable basis and as if any claims for capital allowances were made in the separate accounting period in which the capital expenditure was incurred (EPLA22\S17). The starting point for any just and reasonable apportionment is likely to be based on when income is earned and expenses are incurred in accordance with accounting principles or using management accounts. It may in some circumstances be just and reasonable to use a time apportionment method to apportion levy profits.

Example

Company A’s accounting period runs from 1 January 2022 to 31 December 2022. The levy came into effect on 26 May 2022, so the accounting period straddles the start date. For the purposes of calculating its liability to the new levy, company A is treated as having two separate accounting periods. The first period runs from 1 January 2022 to 25 May 2022. The second period runs from 26 May 2022 to 31 December 2022.

Company A makes an insurance premium payment of £100,000 on 1 January 2022. The sum is an annual payment which covers the period 1 January to 31 December 2022. Whilst the payment was made in January, it covers the whole year and some of the amount should be taken into account for the purposes of the levy. It might be just and reasonable in this instance to apportion the amount on a time basis as follows: 220§/365 x £100,000 = £60,274. This figure would be taken into account for the purposes of calculating levy profits.

S17 and claims to capital allowances

In an accounting period that straddles the start date, end date or rate change date of the levy EPLA22\S17(2) states that profits or loss are to be apportioned as if any claim to a capital allowance were made in the separate accounting periods in which the capital expenditure was incurred. For first-year allowances (FYAs) claimed under Part 2, CAA01 (Plant and machinery allowances) or Part 5, CAA01 (Mineral Extraction Allowances), the full amount of the claim should be apportioned to the notional accounting period in which the expenditure was incurred (EPLA22\S17(2). Similarly, claims for research and development allowances (RDAs) should also be apportioned to the notional accounting period in which the expenditure was incurred.

EPLA22\S17(3) applies to writing down allowances (WDAs). Therefore, WDAs are apportioned between notional accounting periods on a just and reasonable basis. There is no requirement to produce separate capital allowances computations purely for levy purposes, as the starting point for levy profits is the profits as calculated for CT.

Examples

Company B’s accounting period runs from 1 January 2022 to 31 December 2022. In March 2022, Company B incurs £2 million on the acquisition of plant or machinery that qualifies for 100% FYA. In November 2022, it incurs a further £1 million on the acquisition of plant or machinery that qualifies for 100% FYA. For the purposes of calculating levy profits, only the claim for FYAs for the £1 million incurred by Company B in November 2022 would be taken into account (EPLA22\S17(2)).

If both of the assets in the example above were to qualify for 50% FYA rather than 100% FYA (with amounts unrelieved going to a special rate pool), again, for the purposes of calculating levy profits, the company would only be able to take into account the FYA claimed in respect of expenditure incurred in November 2022. At 50%, the company would allocate the FYA of £500,000 relating to expenditure incurred in November 2022 to the separate accounting period running from 26 May 2022 to 31 December 2022 (EPLA22/17(2)). For both the expenditure incurred in March and November 2022, the unrelieved expenditure can attract special rate WDAs in subsequent CT accounting periods (from the accounting period ending 31 December 2023). As the WDAs in respect of the special rate pool will not be available for CT purposes in the accounting period ending 31 December 2022 they cannot be apportioned to the separate accounting periods created by the straddling period so are not allowable against levy profits.

Company B also needs to calculate WDAs in respect of amounts in its main rate pool for the separate accounting periods. The tax written down value (TWDV) of the main rate pool at 1 January 2022 was £820,000. There have been no new additions to the pool in accounting period ending 31 December 2022 and no disposals. At 25%, Company B can claim £205,000 WDAs for CT purposes. For the purposes of calculating levy profits, Company B must apportion the £205,000 on a just and reasonable basis (EPLA22\17(3)). It might be just and reasonable in this instance to apportion the amount on a time basis as follows: 220/365 x £205,000 = £123,562. Therefore, £123,562 would be apportioned to the separate accounting period running from 26 May 2022 to 31 December 2022.

If Company B had added to the main pool in the straddling period, the starting point to calculate the WDA apportioned to the separate accounting periods would still be the WDAs available for CT purposes at the end the accounting period. The WDA is given by reference to the CT chargeable period of one year and accrues on a time-basis (if the chargeable period were less than a year, the WDA for CT would be proportionally reduced regardless of when expenditure is incurred). It is therefore likely to be just & reasonable to time-apportion the WDA. It does not matter if the expenditure has been added to the pool before or after the levy commenced as the allowance is given against the amount in the pool and not when the expenditure was incurred:

Company C’s accounting period runs from 1 January 2022 to 31 December 2022. The TWDV of the main rate pool at 1 January 2022 was £820,000. Company C acquires an asset for £200,000 in February 2022 and another asset for £300,000 in November 2022, both of which qualify for WDAs. No FYAs were claimed in respect of this expenditure and, in total, £500,000 is added to the main rate pool. The value of the pool at 31 December 2022 is £820,000 + £500,000 = £1,320,000. At 25%, the WDA available for CT purposes is £330,000. It might be just and reasonable in this instance to apportion the amount on a time basis as follows: 220/365 x £330,000 = £198,904. Therefore £198,904 would be apportioned to the separate accounting period running from 26 May 2022 to 31 December 2022.

For the accounting periods following the straddling period, the starting point for calculating levy profits will be after any WDA claimed for CT. There is therefore no requirement to calculate an alternative pool for levy purposes. Further guidance on calculating levy profits can be found in OT21720.

To reduce the risk of enquiry, it would be helpful if companies include details of the apportionment method used when submitting returns.

§there are 220 days between 26 May 2022 and 31 December 2022.