6 minute read
Energy Sector
A stop gap protection
Christy Wilson Tax Associate, Katten Muchin Rosenman UK LLP asks whether a new public interest business protection tax can stabilise the energy sector.
Over the last few months, numerous energy supply companies have gone under. In an attempt to stabilise the energy sector, the government has introduced a new temporary tax to deter investors in energy supply businesses from using the company’s assets for their own benefit. This new tax is the public interest business protection tax (PIBPT).
The introduction of PIBPT means that investors in public interest companies, including energy supply businesses, may face a tax of 75% where the company’s assets are used for the benefit of the shareholders, and as a result this accelerates the collapse of said public interest business.
When will PIBPT apply?
PIBPT will apply to the following situations:
● A person holds an asset for the purposes of it being used for the benefit of a public interest business carried on by the person.
● Steps are taken by the person that result in the asset not being used for the benefit of the public interest business.
● The steps taken materially contribute to the public interest business going into special measures or materially contributes to a significant increase in the costs of that business.
● The person was aware (or ought to have been aware) that taking the steps would result in the business entering special measures or a significant increase in the costs of that business.
The government has outlined that the new tax will last from 28 January 2022 to 28 January 2023, but the government can extend the tax until 2025.
Who will be liable?
Although the person who is taking the steps referred to above is principally liable for paying the tax, any companies associated with the principal taxpayer will also be jointly and severally liable.
The timeframe for making a PIBPT return is very short compared to other taxes. The deadline for a PIBPT return, which is done by self-assessment, is 30 days, with the tax being payable within 15 days after. In contrast, corporation tax is payable quarterly for large and very large companies but for other companies it is not due until nine months after the end of the company’s accounting period and the tax return does not have to be filed until 12 months after the end of the accounting period.
The current market
In recent months, the price of gas and electricity has significantly increased. Usually, this would leave companies that have hedged their costs generally neutral. However, these price increases have meant that the companies that have entered into futures contracts are now holding a valuable asset, as the opportunity to buy energy at the lower fixed price contract is not available to the person purchasing energy in the market now.
Whenever an energy supply company goes insolvent, its customers will be transferred to a new supplier. However, the new supplier will not have the benefit of futures contracts for the new customers and so will have to pay large amounts to supply the new customers with energy. If a new supplier cannot be appointed, the original supply company will be placed into a Special Administration Scheme. The government will need to make funds available to the Special Administration Scheme to help them supply their new customers; as such, this creates additional costs for the government.
As energy supply companies often use another company in the same group to hold assets, this other company is able to realise the value in the assets and distribute the resulting profits to its investors, rather than using the assets for the benefit of the energy supply company.
Who will be affected by PIBPT?
In the legislation, a public interest business is defined as being either:
● an energy supply business; or
● a business of a description specified in regulations made by the Treasury.
Given the legislative definition of public interest business, it would be possible to add other types of business via regulation.
There have been many instances in the past (including in the financial sector) where employees have been left without wages or pensions, consequently requiring a government bail-out, even though the company’s shareholders were able to make a profit.
The energy sector is currently the focus of attention due to the corporate structures frequently adopted in order to protect shareholder investment and returns. However, while other sectors may not use exactly the same structure, the results can be the same. By only targeting the energy sector, this suggests that the government only sees the process of gaining a profit from a failing business as an issue within the energy industry, when arguably this is a wider problem within other public interest entities.
How long will the PIBPT be here?
The key reason for the initial introduction of the PIBPT is to regain stability in the energy sector after the sector has endured a number of energy supplier insolvencies. The tax is being introduced to prevent shareholders from cashing out on failing businesses and hopefully this tax will have the desired effect as a deterrent.
What, though, will happen the day after the tax ends on 28 January 2023 (or 2025, if the government chooses to extend the tax)? It could be argued that the energy market will be hit with even greater volatility, as investors have been forced to put their winding-up plans on hold for the year.
Conclusion The PIBPT could be the answer we’re looking for to stabilise the energy sector. It will be interesting to see how the new tax changes the behaviour of investors. If a tax such as this one really does change investor behaviour, could we see a similar tax model being used in other sectors? Of course, as PIBPT is only a temporary measure, a key concern is what happens the day after the tax comes to its scheduled end.
