Introduction

On September 28 2015 the government published a consultation regarding the reform of the energy tax and reporting schemes in the United Kingdom. A plethora of energy reporting schemes, taxes and levies (some of which overlap) exist and the reform aims to simplify procedures to provide a more streamlined, straightforward approach to energy tax and reporting. The consultation does not provide much detail as to the likely scope of changes to the reporting schemes, but it does ask stakeholders to provide alternatives, thoughts and guidance in terms of how to reform the existing regime.

One key proposal is to abolish the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) and the climate change levy in favour of a single consumption tax. This will be of interest to UK franchisors, whose networks may be subject to the CRC.

What is the CRC and how does it apply to franchising?

Introduced in 2010 and reformed in 2013, the CRC is aimed at incentivising companies to become more energy efficient. It is a mandatory scheme applicable to businesses whose energy consumption exceeds a certain threshold (6,000 megawatt-hours of qualifying electricity), with participants required to measure and report on energy consumption and subsequently purchase carbon dioxide emission allowances associated with their respective energy usage.

The system requires actual consumers of the energy to provide relevant reporting statistics and obtain allowances. However, in a franchisor-franchisee relationship, the rule is slightly different. In certain premises-based franchises, the franchisor is responsible for the energy supplies of its franchisees.

Franchisees must provide information and assistance to the franchisor to comply with the CRC. The franchisor will combine total energy consumption and provide aggregated figures for CRC purposes. As the franchisee trades under the brand and direction of the franchisor, the government views the franchisor as the influencer in terms of business operation and energy consumption – with the power potentially to devise more energy-efficient production methods.

An exemption from this rule, however, is the so-called 'landlord and tenant' exemption. Where a landlord receives an energy supply and provides some or all of that supply to its tenants (eg, a multi-let building of which one of the tenants may be a franchisee), it will be deemed to be the organisation that is responsible for the energy supply and therefore any emissions associated with such supply under the CRC Order 2013.

Penalties for non-compliance are severe: the CRC Order 2013 provides for both criminal and civil penalties, ranging from two years' imprisonment to fines and public criticism.

Good news for franchisors?

Potential reforms to the CRC should create an easier reporting system for franchisors, including dispensing with the need to:

  • obtain allowances on behalf of franchisees;
  • assume responsibility for a franchisee's failure to provide information; and
  • include the rather burdensome and convoluted cost-deflection clauses contained in franchise agreements.

Key proposals include a single energy efficiency tax and reporting scheme (with the reporting and tax schemes based on existing procedures) and further incentives to reduce carbon usage.

Rather than having split obligations (with franchisees required to pay other climate change taxes, such as the climate change levy, while having to provide franchisors with similar information to report through the CRC), a streamlined procedure may allow for simplified, less onerous requirements for franchisors and franchisees.

For further information on this topic please contact Gordon Drakes at Fieldfisher by telephone (+44 20 7861 4000) or email (gordon.drakes@fieldfisher.com). The Fieldfisher website can be accessed at www.fieldfisher.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.