Tax Considerations for the Energy Sector

Following what has been a very challenging 16 plus months for Energy Sector businesses, along with most other business, the world is starting to settle back into ‘normality’, whatever that may be now.  

It is hopeful that this normality has a positive effect on all companies who look to increase their profits. Although there is always uncertainty within the Energy Sector, there are a few tax reliefs that can apply to reduce the Corporation Tax bill.   

Corporation Tax losses 

Companies that have incurred Corporation Tax losses during the course of the pandemic will hope to offset these losses against future profits. The profit and losses of Energy Sector companies is likely the most volatile of all sectors and care needs to be taken on how much losses can be offset.   

Although Corporation Tax losses can largely be used against future profits, along with Post-April 2017 brought forward group relief losses, there is a £5m restriction on losses which can be used in the year. Profits above this £5m value can only be relieved up to 50% of the brought forward losses i.e. if £6m profits arose in the year, only £5.5m of carried forward losses can be used.  

This £5m threshold applies to each group and not per company.  

Super-Deduction Capital Expenditure Relief  

The government announced back in the March budget a new Super-Deduction capital expenditure relief that will apply to companies that invest in new Plant & Machinery. This Super-Deduction allows companies to claim Capital Allowances of 130% of the amount of the qualifying Plant & Machinery, opposed to the ordinary 18% written down allowances.  

Energy Sector companies typically invest highly in Plant & Machinery and usually outspend the generous Annual Investment Allowance amount of £1m. This Super-Deduction is in addition to the AIA and will provide vast relief for companies with high capital expenditure.  

The Super-Deduction applies to assets purchased from 1 April 2021 until the end of March 2023, aligning with the increase of Corporation Tax to 25%. These reliefs are just for new, unused plant and machinery, not second-hand or leased assets. Also, equipment planning to offer for rent is not covered, and neither are structures or buildings. 

Research & Development Reliefs  

R&D relief still provides one of the most beneficial Corporation Tax reliefs, with what is believed to be a relatively low take up. 

Energy Sector business generally involve an element of scientific or technologic advancement which will likely qualify for R&D relief. If you are not currently claiming R&D relief, have you considered whether you can?   

R&D relief takes a couple forms depending on the size of your company, as well as other factors, but typically the relief provides an additional expense deduction of 130% of qualifying costs or a Corporation Tax deduction of up to 13% of qualifying costs.  

These R&D reliefs are not just for companies ‘in the green’ to reduce their Corporation Tax bill but also for loss making companies. Companies undertaking R&D can surrender a tax loss to HMRC for a cash payment up to 14.5% of the loss or, if lower, 230% of the qualifying R&D expenditure.  

For further information or assistance with these Corporation Tax reliefs, or if you have any questions, please contact Gregor McCallan or your usual Anderson Anderson & Brown contact.