Following concerted lobbying, HMRC has confirmed to the gas storage industry that certain costs incurred in gas storage will attract relief from corporation tax under the capital allowances regime. It is hoped that such significant relief will further encourage UK gas storage and will be of particular interest to developers and investors. It is not all good news however, as they have also confirmed that certain other costs are excluded from such relief.
In the field of cavern storage in particular, more work needs to be done to maximise the tax position.
HMRC has this week written to the Gas Storage Operators Group and other interested parties to confirm that the cost of purchasing cushion gas and injecting it into on or offshore storage facilities will be expenditure on plant and machinery for capital allowance purposes, so that costs may be written down against UK corporation tax at the rate of 10% or 20% per annum. This is a welcome clarification of a general principle which has taken some time to obtain. HMRC will shortly publish a Brief, which will seek views from interested parties on certain technical matters relating to the treatment of cushion gas. We expect to be able to contribute to this debate also and would welcome the opportunity to communicate the views of our clients and contacts.
HMRC has also confirmed that the cost of drilling a borehole to an underground salt cavern for gas storage will constitute qualifying expenditure for capital allowance purposes. HMRC does not specify why, although it is understood this is analogous to treatment of boreholes in the water industry. HMRC goes on to state, and to provide technical reasons for, its view that the costs of leaching the salt from a cavern are not eligible for such treatment.
Our view is that this last conclusion is not surprising in the light of the law as it stands, but undoubtedly the law needs to be changed to allow relief. The costs of leaching are sufficiently substantial to make tax relief critical for the viability of cavern storage projects and lobbying on this should continue.
However, in passing, HMRC note that where the leached brine is processed into salt which is sold in the course of a trade then the costs of extraction may be allowed as a revenue expense in that trade - an opportunity which operators may well wish to pursue in the meantime.
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The original publication date for this article was 22/04/2009.