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Finance Act 2010

Background Note

13.At Budget 2009 the Government announced that capital expenditure on cushion gas that functions as plant in a gas storage facility qualifies for plant and machinery capital allowances, but said it would discuss, with the industry, certain technical and revenue protection issues arising from this treatment.

14.A number of points in relation to cushion gas were discussed with stakeholders. After considering the stakeholders’ views and helpful comments the Government decided that no action (other than a watching brief) would be taken in relation to some points but that the matters (now addressed by this section) did require specific legislation.

Rate of WDAs

15.In the prior discussions with the industry, it was accepted that, in the main, expenditure on cushion gas would normally qualify for 10 per cent allowances as “long-life asset expenditure” (that is, expenditure on an asset that may reasonably be expected to have a useful economic life of at least 25 years when new, as defined in section 91 of CAA). However, the industry also suggested that the expected use of cushion gas in certain gas storage facilities might be less than 25 years if the facility itself had an expected useful life of less than 25 years and, in these circumstances, the gas should qualify for main rate WDAs. The Government decided that as cushion gas does not wear out, nor necessarily lose its value by the mere passage of time, the 10 per cent “special rate” of WDA is the more appropriate rate for expenditure on an unusual asset of this kind.

16.The legislation, therefore, specifies that expenditure on cushion gas will be a further type of special rate expenditure in order to fix the rate of WDA at 10 per cent a year.

Leases of cushion gas

17.As it is accepted that cushion gas in a gas storage facility constitutes plant, it may be leased under a plant and machinery lease. However, cushion gas is different from most other plant and machinery in that it does not wear out. It would, therefore, have been possible to write very long operating leases of cushion gas, without ever triggering the application of the long funding lease rules. This could have meant that leases of cushion gas would have been taxed by reference to their legal form, rather than commercial substance, which would have been at variance with the 2006 leasing reforms.

18.The legislation therefore specifies that all leases of cushion gas are to be funding leases for the purposes of the Taxes Acts. This means that, from the perspective of the lessor, any lease of cushion gas for five years or more will be taxed by reference to the commercial substance rather than the legal form. The lessee, where UK resident, will have the choice of claiming a deduction for the lease rentals in accordance with the accounting treatment, or of opting to claim capital allowances with a restricted deduction in respect of the lease rentals. Overseas lessees will be entitled to claim under the rules applicable to their particular jurisdiction and will not be affected by these changes.

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