540A Disposal of certain emissions allowances

Summary

The EU Emissions Trading Scheme (ETS), established under Directive 2003/87/EC, is a scheme that enables reductions in EU emission of greenhouse gases, committed to under the Kyoto agreement, to be achieved in a cost-effective way. The scheme operates by setting an overall limit on the level of emissions allowed in the EU, allocating emission allowances to enterprises operating within the scheme and requiring these enterprises to surrender sufficient allowances each year to cover their emission levels. Within the overall EU limit, enterprises can buy and sell emission allowances depending on their current and projected needs. An emission allowance gives the holder the right to emit one tonne of CO2 or the equivalent amount of another greenhouse gas.

Section 43 of the Finance Act 2012 introduces two new sections to clarify the direct tax implications of two important aspects of the scheme. A new section 81C is also inserted into the Act to confirm that a tax deduction is available for expenditure incurred on the purchase of emission allowances under the EU scheme and that the consideration for the disposal by a company of such allowances, for the purposes of its trade, is deemed to be a trading receipt of the trade – see Part 4.

Section 540A provides that where a permit holder sells, transfers or disposes of allowances acquired free of charge from the Environmental Protection Agency under the ETS scheme, or an interest in or rights over such allowances, the transaction will be treated as the disposal of an asset for capital gains tax purposes and chargeable to tax at the CGT rate. The tax charge will also apply to the disposal of such an allowance acquired by a company under the capital gains tax deferral provisions of section 617 in the case of intra-group transfers, section 615 in the case of the transfer of business assets under a scheme of reconstruction or amalgamation, or section 631 in the case of the transfer of a trade. The section applies to disposals made on or after 8th February 2012.

Details

Definitions

(1) This subsection is a definitions subsection and defines, for the purposes of the section, the following terms:

• “Agency”;
• “aircraft operator”;
• “Directive”;
• “emissions allowance”;
• “installation” and “operator”;
• “permit”;
• “relevant person”; and
• “relevant scheme”.

Sale, transfer or disposal of emissions allowance

(2) Subsection (2)(a) provides that, subject to paragraphs (b), (c) and (d) and notwithstanding section 110 or any other provision of the Tax Acts, where a relevant person sells, transfers or otherwise disposes of an emissions allowance – in this section referred to as a ‘relevant emissions allowance’ – received or receivable free of charge by that person from the Agency in accordance with the Directive, such a sale, transfer or disposal constitutes the disposal of an asset for capital gains tax purposes and shall be treated as not being a disposal of trading stock. In addition, the subsection, in paragraph (a)(ii), provides that where any other company sells, transfers or otherwise disposes of a relevant emissions allowance which it acquired under, or as part of a relevant scheme, as defined, such sale transfer or disposal shall also constitute a disposal of an asset for capital gains tax purposes and shall be treated as not being a disposal of trading stock.

Interest or rights in or over emissions allowance

Subsection (2)(b) provides that the sale, transfer or disposal of a relevant emissions allowance shall include the sale, transfer or disposal of any interest or rights in or over such an allowance.

Surrender and cancellation of emissions allowance

Subsection (2)(c) provides that the surrender and cancellation of an emissions allowance in accordance with Article 12 of the Directive shall not constitute a sale, transfer or disposal for the purposes of paragraph (a).

Previous transfers

Subsection (2)(d) provides that the provisions of paragraph (a)(ii) shall not apply to any sale, transfer or disposal of a relevant emissions allowance where, at any time before that event, such allowance was previously transferred in circumstances where the transfer was not made under, or as part of, a relevant scheme, [being a scheme of reconstruction or amalgamation to which section 615 applies, a transfer of an asset in relation to which section 617 applies or a transfer of a trade, or part of a trade, in relation to which section 631 applies.] This paragraph will ensure that, once the disposal of an emission allowances has been subject to a capital gains tax charge there will be no charge to CGT on subsequent disposals of that allowance.

Chargeable amount

(3) Subsection (3)(a) provides that, in computing any chargeable gain on a disposal referred to in subsection (2), no sum shall be allowed as a deduction from the consideration for the disposal apart from incidental costs to the person making the disposal. Since the allowances in question were acquired free of charge, capital gains tax will be charged on the full disposal proceeds less any incidental costs to the disponer.

Purchased allowances deemed to have been disposed of first

Subsection (3)(b) provides that, in computing any chargeable gain on a disposal referred to in subsection (2), any purchased allowances will be deemed to have been disposed of before free allowances are disposed of by a company.

Non-application of section 596

(4) Subsection (4) provides that the relieving provisions of section 596 will not apply where a relevant emissions allowance acquired by a person is appropriated as trading stock of the trade carried on by that person.

Relevant Date: Finance Act 2019