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Electricity (Miscellaneous Provisions) Act 2003

Section 4:  Undertaking to provide assistance disregarded for tax purposes

21.The relevant background to this section is the accounting and tax treatment of nuclear liabilities and payments towards them. In the main, nuclear liabilities are accounted for on an accruals basis - ie a company accounts for a liability as that liability is incurred, rather than when cash is actually paid out. For example, liabilities relating to dealing with spent fuel are recognised as soon as the fuel is irradiated (used) within a reactor, and decommissioning liabilities are recognised once a reactor is switched on. Similarly, the bulk of liabilities are treated for tax purposes on an accruals basis. Companies can claim tax relief on the provisions they make against liabilities as these are accrued (to the extent that the actual expenditure would be allowable for tax) - they would not then receive tax relief when actual cash payments are made since the liabilities are treated on an accruals basis. An undertaking to provide financial assistance for liabilities that are taxable on an accruals basis would be treated in a similar way - that undertaking would be recognised for accounting and tax purposes on an accruals basis (ie when the undertaking is given and the entitlement arises) not on a cash basis (when individual payments are made).

22.If the Government gives an undertaking to a company to provide a grant in respect of accrued expenditure this undertaking will be recognised – under generally accepted accounting practice - as an asset to the company in its balance sheet.

23.When a company first recognises such an asset in its balance sheet, this recognition would give rise to a credit in its profit and loss account. And under tax law this credit would be included in the tax computation to establish the amount of profit made by the company which is liable for corporation tax. So if the company is already making a profit, the amount of taxable profit would increase, meaning that the company would pay more tax. Alternatively if the company is otherwise making a loss, the level of the loss would be reduced by the recognition of the undertaking and so the amount of loss available to be carried forward to later years would be reduced (so the company may pay more tax in later years once it does make a profit).

24.Section 4 provides that the initial recognition of a Government undertaking to make a grant under Schedule 12 to the Electricity Act in respect of qualifying expenditure in a company’s accounts would not be included in the tax computation (“ a disregard”).

25.This disregard would only apply to the initial recognition of an undertaking – ie the value recognised by the company when it first receives the undertaking. It would not apply to any subsequent change in estimated value of the undertaking or the expenditure to which it relates (which would also generate a corresponding credit or debit in the profit and loss account). The valuation of the undertaking may change over time for different reasons for example:

  • an undertaking which relates to expenditure in the distant future would be recognised in the accounts on a present value basis (cash cost discounted over time); subsequently as time moves on and the payments become closer, so the valuation of the undertaking would increase (because the discount becomes less significant)

  • if the undertaking is written in terms of paying for a particular liability without setting a price, then any change to the expected cost of the liability would be reflected in the value of the undertaking

26.Where the undertaking has been treated on an accruals basis for tax purposes, actual flows of cash coming from the undertaking would not then themselves be subject to tax (just as, similarly, cash payments by the company on nuclear liabilities would not be eligible for tax relief, where relief had already been given on an accruals basis).

27.This particular tax disregard for Schedule 12 grants will only be available for undertakings given prior to 31 March 2008. But this latter date can itself be extended by Statutory Instrument up to 31 March 2011 at the latest.

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