Budget measures and the Energy, Infrastructure and Environment sector

For the Energy, Infrastructure and Environment sector, the 2021 Budget should be seen as being in line with the heavily trailed pre-Budget announcements as a good news story overall.

The Budget indicates energy and infrastructure investment is a key pillar of the Chancellor’s plans to spend and grow the UK economy in a post Covid and Brexit landscape. The announcements today included a range of measures intended to relieve the pressure on businesses in the short term, provide an element of certainty over the immediate tax environment, as well as to focus and encourage new investment in the infrastructure sector more generally. As ever there is some devil in the detail of the specific tax policy announcements, as well as the lingering feeling of unease over how measures will be paid for in the longer term.

In the short-term the focus on investment was signaled by a commitment to generous first year allowances available on a wide range of expenditures qualifying for capital allowances. For expenditure incurred between 1 April 2021 and 31 March 2023, first year allowances can be claimed for plant and machinery main pool expenditure at a rate of 130%, and for special rate pool expenditure at 50% with no initial limits on the specific types of qualifying expenditure within those categories or caps on total spend. In addition, the annual investment allowance has also been maintained for other amounts outside the expenditure claimed under these first year allowances. For infrastructure slated to begin construction during that time frame, there could be upside in having a significant proportion of the capital expenditure available as a tax deduction up front to reduce taxable profits or generate tax losses. For larger scale operators these measures will be an upside to existing investment plans, but for new developers these changes may be even more financially beneficial

These enhancements will combine with the temporary measures extending the loss carry back rules from 1 to 3 years, which will enable losses generated across year ending 31 March 21 and the year ending 31 March 22 to be carried back over a longer period. The benefits of these measures are capped at £2m for a single entity, whilst companies  in a corporate group may carry back trading losses of up to £200k with no group restriction, subject to a £2m cap across the group as a whole, which may limit the upside for larger groups. 

The benefits of the enhanced reliefs are offset to some degree by the announcement that from 1 April 2023 the headline rate of UK corporation tax would increase to 25%, a significant increase from the current rate of 19% for companies with profits over £250k per annum. Only those with taxable profits of less than £50k, of which there will be few in the sector, will benefit from the existing rate past that date. For the majority of groups of companies in the sector, the increased rate is likely to be the norm in terms of future tax cash flows. Looking at these measures combined, a key consideration for the sector would be whether it is beneficial to utilise these losses against historic profits taxed at 19%  to generate a cash rebate, or whether they would be best reserved for use against profits to be taxed at 25%.

At the macro level, the announcements around Freeports and the creation of a £40bn National Infrastructure Bank demonstrate the Government’s continued desire to use infrastructure as a catalyst for the economic bounce-back as part of the Build Back Better programme. The Chancellor stressed that these wider measures support the continued development of the renewable energy sector, both in terms of currently established technology such as wind power, as well as new energy technologies.

As part of this new landscape, the National Infrastructure Bank in particular, will be something the sector will look at with interest. While this new bank’s primary mandate will be the support of private infrastructure investment, as well as some support for Local Authority led strategic infrastructure, the exact remit will be outlined over the course of the spring. As further details emerge, there will be interest in whether this new institution can support new/higher risk energy sector technologies and how it compares to its predecessor such as the UK Green Investment Bank. This, together with the wider measures over the reform of the capital markets more generally, indicate '‘the Chancellor’s desire to increase the access to funds for infrastructure investment, whether via debt or other forms.

At a practical level, the Energy sector will need to be mindful that some Budget measures will have effect much sooner than others. Therefore, companies should be aware of the legislation giving effect to the repeal of the application of the EU Interest and Royalty Directive, so that from June 2021 it will no longer be possible to rely on it to reduce withholding taxes on interest payments to associates in the EU to 0%. This may impact on cross-border financing into the UK.

In addition, the new Finance Bill will include the changes to the Construction Industry Scheme designed to tackle historic abuse in the sector.  This, combined with the changes to off-payroll working and the VAT reverse charge mechanism are all practical matters to deal with immediately in this capital intensive sector. Therefore, the sector will still have immediate weeds to be tended before the garden really begins to grow as we progress through Spring.

Bob Green, the Head of UK Energy, Infrastructure and Environment at Mazars said, “Today’s Budget represents an implementation of the Government’s well documented national infrastructure plan, as well as their commitment to supporting clean economic growth leading to the net zero commitment in 2050. The Chancellor has not presented any significant surprises in this respect, but added some “meat onto the bones” of these plans, re-affirming the Government’s acceptance of infrastructure spending as a catalyst for growth and key pillar to the economic recovery. The changes announced today are part of setting the framework for this continued direction of travel.

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