UK: UK Budget 2010 – Energy Sector Update

Last Updated: 26 March 2010
Article by Ray Smith, Humphrey Douglas and Charlotte Marfleet

The Budget 2010, Securing the recovery, was delivered by the Chancellor on 24 March 2010. The Budget included the following announcements which are important for the energy sector.

Capital allowances: plant and machinery: cushion gas

Legislation will be introduced in the Finance Bill 2010 to treat:

  • All leases of cushion gas as "long funding leases" for capital allowance purposes; and
  • All expenditure on cushion gas as "special rate expenditure", qualifying for writing-down allowances at 10 per cent per year.

These changes will apply to leases commencing, and expenditure incurred, on or after 1 April 2010.


At Budget 2009, the Government announced that capital expenditure on cushion gas that functions as plant, in gas storage facilities, qualifies for plant and machinery allowances, but said it would discuss with industry certain technical revenue protection issues arising from such treatment. Following the 2009 announcement, it was hoped that the Government might be prepared to allow such capital expenditure to qualify for the main rate of writing down allowances (WDAs) of 20 per cent, which applies in relation to general plant and machinery. It is, therefore, somewhat disappointing that the Government has decided that such expenditure should be treated as special rate expenditure qualifying for WDAs at the reduced rate of only 10 per cent. However, since cushion gas does not strictly wear out, capital allowances at the same rate as for long life assets is not surprising.

The decision to treat all leases of cushion gas as funding leases is effectively one of the technical revenue protection measures the Government referred to in 2009. This will ensure that, where cushion gas is leased for more than five years, the lessor will be taxed by reference to the commercial substance of the transaction (i.e. as a financing transaction), rather than the legal form, and the lessee, if tax resident in the UK, will have the option to claim the capital allowances.

North Sea fiscal regime: reinvestment relief

Oil and gas companies that operate in the UK or on the UK continental shelf (UKCS) will be affected by changes to capital gains reinvestment relief in new oil trade assets.

  • The 2009 Budget announced a package of measures that were introduced in the Finance Act 2009 (FA 2009) to provide support through the UK oil and gas fiscal regime for investment in the UK and UKCS. FA 2009 provided that chargeable gains would not arise in some circumstances where disposal proceeds are reinvested in new oil trade assets and the disposal and acquisition qualify for rollover relief.
  • The Government noted that the FA 2009 legislation was intended to apply in a group context where the disposal is made by one company in the group, and the acquisition is made by another company in the group. However, a technical oversight in the drafting of the FA 2009 legislation prevents it applying in such circumstances. Consequently, the legislation will now be amended so that it can apply as intended.


The Government states that the change will have effect in relation to disposals made on or after 24 March 2010. As the change is intended to allow the legislation to apply as always intended, it is surprising that the change has effect only from 24 March 2010, and not from the earlier date when the FA 2009 legislation came into effect.

Budget for green jobs and growth: Energy and Climate Change Secretary Ed Miliband said: "This Budget will help propel the UK Further and faster towards the Green industries of the future."

Investment in low carbon technologies was at the heart of the Budget 2010. Major low carbon components of the Budget included:

  • the creation of a new Green Investment Bank for low carbon development;
  • an Offshore Wind Infrastructure Competition for up to £60m; and
  • the publication of the Energy Market Assessment for Energy Market reform.


According to the Department of Energy and Climate Change (DECC), the new Green Investment Bank could be a major step in overcoming the finance challenge confronting infrastructure projects in the UK. It may be particularly important for the energy sector given the scale of the investment needed to bring forward low carbon electricity, and may have an early focus on offshore wind.

The DECC has commented that supporting the development of the offshore wind sector is seen as crucial to enable the UK to realise its renewable energy ambitions. Britain is, and will remain for the foreseeable future, the largest single market for offshore wind in the world according to the DECC.

The initial findings of the Energy Market Assessment were published alongside the Budget and, according to the DECC, have the effect of narrowing down the options for market reform to incentivise the necessary investment over the next few decades and to ensure that the consumer gets the best deal in the long term.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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