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CLAUSE 66 AND SCHEDULE 18: FIXTURES PROVIDED IN CONNECTION WITH ENERGY MANAGEMENT SERVICES

SUMMARY

1.   This Clause and Schedule extend the special rules for giving plant and machinery capital allowances on fixtures to expenditure on designated energy-saving equipment which a business is contracted to provide and operate under an energy services agreement.  They apply in cases where the business does not hold an interest in the land to which the equipment is attached.

2.   The effect of the clause and schedule is to treat the energy services provider as the owner of such equipment for capital allowances.  Energy services agreements that require the energy services provider to procure and actively manage the equipment on a day-to-day basis as part of a comprehensive energy management service are distinguished from normal commercial leasing arrangements.  This opens the way to claims by energy services providers for 100 per cent first year allowances on their expenditure on energy-saving plant and machinery under clause 65.

3.   Under the existing special rules for fixtures, a business that incurs expenditure on plant or machinery that is fixed to another person’s land but which does not itself hold an interest in the land to which the equipment is fixed is not entitled to FYAs. The expenditure will be on assets for leasing or letting out on hire.

4.   Energy services provider are businesses that provide energy management services to help other businesses reduce their energy needs.  Services range from the provision of energy efficiency advice, the commercial leasing of energy-saving equipment, to the comprehensive services of design, installation, operation and maintenance of energy saving machinery at a client’s premises.

DETAILS OF THE CLAUSE

5.   Clause 66 gives effect to Schedule 18 for chargeable periods ending on or after 1 April 2001 for the purposes of for corporation tax cases and for chargeable periods ending on or after 6 April 2001 for income tax cases. The schedule contains special rules concerning fixtures provided in connection with energy management services.

Schedule 18 - Fixtures provided in connection with energy management services

6.   Schedule 18 sets out the conditions that have to be met by an energy services provider in order for it to be treated as the owner of plant or machinery that it installs and operates on another person’s premises under an energy services agreement without taking an interest in the land to which the equipment is fixed. The schedule also integrates these rules into the other rules for fixtures and contains special provisions to deal with situations in which the energy services provider is treated as ceasing to own the equipment for capital allowance purposes.

7.   Paragraph 1 extends the scope of the special rules for fixtures in Chapter 14 of Part 2 Capital Allowances Act 2001 (“CA 1990”) to include fixtures provided in connection with energy management companies.

8.   Paragraph 2 inserts a new Section 175A into CAA 2001.

9.   Section 175A sets out the meaning of “energy service agreement”.  This is defined in subsection (1) by reference to the range of services to be provided by the energy services provider to another person (“the client”) with a view to saving energy or achieving energy efficiencies. subsection (2) defines what is meant by “energy services provider”.

10.Paragraph 3 ensures that, where they apply, the special rules for energy services providers take precedence over the rules in Section 176 CAA 2001. These deal with the deemed ownership of fixtures where the person incurring the expenditure on the fixture holds an interest in the land to which it is fixed.

11.Paragraph 4 inserts a new Section 180A into CAA 2001.

12.Section 180A contains the rules which treat plant or machinery installed and operated under an energy services agreement as belonging for capital allowance purposes to the energy services provider.

13.Subsection (1) of Section 180A sets out the basic rules. They mirror the existing rules for equipment lessors, but contain provisions particular to energy services agreements.

14.Subsection (1)(a) requires that an energy services agreement be entered into.

15.Subsection (1)(b) provides that the energy services provider must incur capital expenditure on the provision of plant or machinery under an energy services agreement.

16.Subsection (1)(c) requires that the plant or machinery becomes a fixture when installed.

17.Subsection (1)(d) requires the client to have an interest in the land to which the equipment is fixed at the time of affixation and that, at the same time, the energy services provider must not have an interest in that land.

18.Subsection (1)(e) provides that the plant or machinery must not be leased to the client, nor provided for use in a dwelling-house.

19.Subsection (1)(f) requires the energy services provider, or a person connected with him to operate, wholly or substantially, the plant or machinery.

20.Subsection (1)(g) provides that the energy services provider and the client must not be connected with each other. Section 575 CAA 2001 defines connected persons in this context.

21.Subsection (1)(h) requires the energy services provider and the client to make a joint election for the energy services provider to be treated as the owner of the fixture.

22.Subsections (2) and (3) prevent subsection (1) having effect if the client would not have been entitled to an allowance as a result of the special rules in Section 176 CAA 2001 for fixtures where a person holds an interest in the land to which the equipment is fixed had it incurred the expenditure on the energy-saving plant or machinery. But this does not apply if the plant or machinery is of a class specified by the Treasury. This means an energy services provider could claim plant and machinery allowances on expenditure on designated classes of energy-saving plant or machinery even if the client is outside the charge to tax.

23.Subsection (4) provides that, where an election is made under subsection (1h), the fixture is not treated as belonging to the client.

24.Subsection (5) set the time limits for making an election under subsection (4). For income tax purposes it is the normal time limit for amending a return for the relevant chargeable period under the self-assessment rules. For corporation tax it is 2 years after the end of the relevant chargeable period.

25.Subsection (6) defines the “relevant chargeable period. It is the chargeable period in which the capital expenditure on the fixture was incurred.

26.Paragraph 5 ensures that, where they apply, the special rules in Section 182A concerning the discharge of obligations under an energy services agreement take precedence over the rules in Section 181 CAA 2001.  These deal with cases in which a purchaser of land gives consideration for fixtures attached to the land.

27.Paragraph 6 inserts new Section 182A into CAA 2001. This deals with cases in which a purchaser of land discharges the obligations of the client under an energy services agreement.

28.Subsection (1) of Section 182A treats the ownership of plant or machinery provided under an energy services agreement to be transferred to the person who acquires the interest in the relevant land to which it is fixed, where, in connection with the acquisition, the purchaser pays a capital sum to discharge the client’s obligations under the energy services agreement.  The purchaser is treated as incurring expenditure equal to the capital sum.

29.Subsections (2) and (3) prevent subsection (1) from applying if a person has a prior right in relation to the fixture immediately after the time that the purchaser acquires the interest in the relevant land. The rules in section 181(3) CAA 2001 apply to determine whether a person has a prior right.

30.Paragraph 7 amends Section 188 CAA 2001 so that it also applies in cases within the new section 182A. The effect is that, where the purchaser of land to which the equipment is fixed, discharges the obligations of a client under an energy services agreement in respect of the equipment, the rules in section 188 apply so that energy services provider ceases to be the owner of the fixture for capital allowances.  This complements the rule in new section 182A which treats the purchaser as being the owner of the equipment.

31.Paragraph 8 inserts new Section 192A into CAA 2001. This deals with cases in which the energy services provider ceases to own fixtures.

32.Subsection (1) of Section 192A sets out the scope of the section. It applies in cases in which an energy services provider is treated as the owner of plant or machinery fixtures under the new section 180A.

33.Subsection (2) treats an energy services provider as ceasing to own a fixture if, at any time, it assigns its rights under the energy services agreement, or the financial obligations of the client in respect of the fixture under the energy services agreement are discharged.  The energy services provider is treated as ceasing to own the equipment at the time the relevant relevant event occurs.

34.Subsection (3) extends the reference to the client in subsection (2) to include any person in whom the financial obligations of the client have subsequently become vested.

35.Paragraph 9 inserts new Section 195A and Section 195B into CAA 2001. These deal with cases in which ownership of the energy-saving plant or machinery is to be treated as being transferred to an assignee of an energy service provider, or to the client.

36.Section 195A applies where the new section 192A(2)(a) applies. This is the case in which the energy services provider is treated as ceasing to own the fixture as a result of the assignment of the energy services agreement.

37.Section 195A(1) treats the assignee as having incurred expenditure on the provision of the fixture and, as a result of the assignment, the assignee is treated as the owner of the fixture. The consideration given by him for the assignment is treated as the amount of his expenditure on the fixture.

38.Section 195A(2) treats the assignee as being an energy services provider who is treated as owning the fixtures under section 180A. This permits the cessation rules in section 192A to apply to a subsequent assignment or, to the case in which the client’s financial obligations are subsequently discharged.

39.Section 195B applies where the new section 192A(2)(b) applies. This is the case in which the client (or some other person in which the financial obligations have become vested) has paid a capital sum to the energy services provider to discharge his obligations under the energy services agreement.

40.Subsection (1) treats the client as having incurred expenditure on the provision of the fixture and, as a result, the client is treated as the owner of the fixture. The capital sum is treated as the amount of his expenditure on the fixture.

41.Subsection (2) applies Section 192A(3) in relation to subsection (1).  This extends the reference to client in subsection (1) to include any person in whom the obligations of the client in respect of the equipment under the energy services agreement have become vested.

42.Paragraph 10 amends section 196 CAA 2001 to include rules for determining the disposal value to be taken into account in relation to fixtures where a fixture ceases to belong to a person as a result of events within section 192A.

43.Paragraph 11 adds section 182A(2) to the list of relevant reasons for the purposes of section 203(2)(b) CAA 2001.  Section 203 requires a person who has made a return and who becomes aware that anything in the return is incorrect for certain reasons, to give notice to the inland Revenue within 3 months of becoming so aware of the amendments that are required.

BACKGROUND NOTE

44.Capital allowances allow the cost of capital assets to be written off against taxable profits. They take the place of depreciation in the commercial accounts, which are not allowed for tax.

45.There are special rules for fixtures. They apply where plant or machinery is fixed in or to a building or any other land so as to become, in law, part of the building or land. They set out a comprehensive code to determine to whom the fixtures are deemed to belong, and thus who is entitled to claim capital allowances. Broadly speaking, if a person incurs capital expenditure on the provision of a plant or machinery fixture, it is treated as belonging to that person even if legal ownership lies elsewhere.

46.The existing rules for fixtures also apply where the person incurring the capital expenditure does not have an interest in the land in, or on which the machinery or plant is fixed and the plant or machinery is provided for leasing.