OT21780 - Energy Profits Levy: Meaning of financing costs  

EPLA22\S8

Financing costs is defined in EPLA22\S8(2) as the costs of debt finance. Such costs do not qualify as “investment expenditure” under EPLA22\S2. Financing costs includes the following:

  • loan relationship debits in respect of debtor relationships,

  • forex differences arising in relation to debt finance,
  • trading profits or losses on derivative contracts in relation to debt finance,
  • the financing cost implicit in a payment under a finance lease,
  • any other costs arising from what would be considered a financing transaction in accordance with generally accepted accounting principles (GAAP).

The definition is drawn very widely.

Certain costs related to finance leases (finance lease is defined in EPLA22\S8(6)) are also treated as finance costs for calculating the levy profits of a company. Such an amount is to be treated as a financing cost implicit in a payment under a finance lease and hence a cost of debt finance, (EPLA22\S8(3)(d)).

Where a payment which would fall to be treated as a finance charge or interest expense under a finance lease for the purposes of GAAP but is not treated as such in the accounts of the company, then these will be treated as financing costs (EPLA22\S8(4)).

Repayments of financing costs are also excluded when calculating the levy profits, (EPLA22\S8(5)).

In the case of a right-of-use lease, the lessee and any person connected with the lessee are to be treated as being companies which are incorporated in the UK, by virtue of EPLA22\S8(7). This provision is aimed primarily at companies or groups that are not required to draw up their accounts under IAS or UK GAAP because, for example, they are non-UK resident.