81C 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 introduced two new sections to clarify the direct tax implications of two important aspects of the scheme. 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 – see Part 19.

This new section 81C 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. For the purposes of the section emission allowances includes emission reduction credits issued under the Kyoto Protocol. These credits, known as certified emission reductions or CERs and emission reduction units or ERUs, are generated by emission-saving projects undertaken in third countries subject to a verification process under the Kyoto Protocol. These credits are traded in the carbon market and can be exchanged for EU allowances for the purposes of meeting a company’s compliance obligations under the EU Scheme.

Details

Definitions

(1) “Directive” has the same meaning as in section 540A

“emissions allowance” means an emissions allowance, emission reduction unit or certified emission reduction unit within the meaning of Article 3 of the Directive;

“profit and loss account” has the same meaning assigned to it by generally accepted accounting practice and includes an income and expenditure account where a company prepares accounts in accordance with international accounting standards.

(2) This section provides that a tax deduction is available to a company for expenditure incurred for the purposes of the trade on the purchase of emissions allowances.

(3) Subject to section 540A amounts received or receivable for the disposal of purchased emissions allowances shall be treated as trading receipts of the company’s trade.

Relevant Date: Finance Act 2021