Summary and implications
The deadline for registering under the CRC Energy Efficiency Scheme (CRC) has now passed (30 September). Yet, confusion still reigns over the application of many areas of the scheme, not least who, if anyone, should register for funds, trusts and other structures.
If you’ve struggled to work this out – you’re far from being alone! But don’t be put off getting on with your application just because the deadline has passed – you will not be alone and we understand that the Environment Agency will exercise their discretion so long as you let them know you’re having difficulty.
The CRC rules were not written to take account of the complexities of real estate and other investment structures. It often seems as if fund and trust structures are having to be shoe-horned into the CRC rules, which at times produces some perverse results.
This briefing highlights a few of the issues that registrants are continuing to grapple with and examples of how the CRC rules may apply in certain situations.
The application of the CRC rules to particular vehicles and structures is both complex and needs to be examined on a case-by-case basis applying the contractual and factual background.
Back to basics
Analysing CRC responsibility for an energy supply involves asking the following questions:
- Is there an energy supply agreement (a party receives supply and is liable to pay for it)?
- Is that party an “undertaking” (in a private sector context, a body corporate, a partnership or certain unincorporated associations)?
- Does that party actually consume the supply itself, and if it does not, does it give permission to occupy to the person who does?
The party who answers ‘yes’ to all of these questions will be the one with CRC responsibility for that supply. This could be an underlying investment vehicle (i.e. a limited partnership) or another undertaking. It may be, however, that no entity responsible for CRC can be established.
CRC is causing headaches in the funds and real estate industry over its application to both holding and investment structures.
A blunt approach – ignoring the actual owner
Where the same entity holds legal title to a property and buys its energy supplies, CRC responsibility falls to that entity. This applies whether or not the property is held on trust for another person (i.e. beneficiary) or for several different beneficiaries. So, where for example this applies to trustees of a unit trust, the result is ‘cross-contamination’ of CRC performance and costs across unrelated trusts. The approach is blunt! As a result, some professional trustees are considering re-structuring – not to escape the CRC – but to enable proper ring-fencing of trusts.
Grouping – another conundrum
The CRC rules use the provisions of the Companies Act 2006 (the Companies Act) for aggregating CRC supply across groups. These provisions do recognise the role of a fiduciary.
Recognition of the fiduciary role by the Companies Act means that where a trustee or fiduciary’s group invests in a structure or fund the trustee or fiduciary is not automatically grouped with that structure or fund for CRC purposes. However, a trustee or fiduciary’s underlying investor or beneficiary may fall within the same group as the underlying investment vehicle if, for example, that investor or beneficiary is an “undertaking” and is deemed to exercise a dominant influence over the structure or fund.
Limited partnerships – further complications
A limited partnership typically involves nominees holding legal title to property for the relevant partnership. Contracts for energy supplies may have been placed in the name of any of the nominees, the limited partnership, its general partner or its property manager. If the supply analysis concludes that CRC responsibility falls to the limited partnership, a grouping analysis is then required of the limited partnership.
The CRC Order slavishly applies the grouping rules in the Companies Act. This leads to areas of uncertainty, some of which are highlighted in the table.
Where there is more than one potential parent, the Environment Agency will have to adopt a practical approach to work out which is the single, most ‘suitable’ parent, if any. The obvious and practical solution would be to follow accounting treatment since accounting standards avoid imposing group accounts consolidation on more than one parent company.
Set out below for illustrative purposes only are two case studies to show the application of the CRC rules to investment structures. We have set out our analysis of the CRC supply responsibility and grouping issues, firstly for a limited partnership and secondly for a trustee’s investment through a unit trust in a limited partnership.
Please click here to view the diagram for a UK Limited Partnership.
Legal title to the property is held by the General Partner and its nominee. The energy supply agreement is in the name of the Limited Partnership (UKLP) and it was billed for more than 6,000 MWh of electricity through half hourly meters in the calendar year to 31 December 2008. The limited partner investors are independent of the UKLP.
Responsibility for CRC supply
- The UKLP is an ‘“undertaking” for Companies Act purposes and although not in actual occupation, permission to occupy is given on its behalf.
- The UKLP therefore has CRC responsibility for the relevant energy supplies.
- Note that the analysis could be different where either a single title nominee or two (or more) title nominees or a corporate general partner was or were the counterparty to the energy supply agreement.
What about grouping?
- The UKLP should not be grouped with any limited partner if no limited partner has a controlling interest.
- The potential position of the UKLP being grouped with the General Partner is more complex and the Companies Act, relevant accounts and provisions of the partnership deed, such as ability to remove the General Partner, may be relevant. There is considerable debate and disagreement about the proper treatment of general partners.
Please click here to view the diagram for a UK Limited Partnership with Jersey Unit Trust as feeder vehicle.
The legal title to the property is held at UKLP level, as in the previous case study. The Jersey Unit Trust (acting by its trustee) is the limited partner in the UKLP. The unitholders have a beneficial interest in the Jersey Unit Trust.
Responsibility for CRC supply
The trustee of the Jersey Unit Trust is not responsible for the relevant energy supplies (this will either fall to the UKLP or be outside CRC altogether).
What about grouping?
On the basis that CRC responsibility falls to the UKLP, will the trustee be grouped with the UKLP?
- The answer is no, on the basis that the trustee holds its interest in the UKLP in a fiduciary capacity and the Companies Act consequently disregards the trustee’s own interest in the UKLP.
What about the Jersey Unit Trust?
- The unit trust itself should not be regarded as an “undertaking” under the Companies Act, so cannot participate in the CRC regime.
- The position of the unitholders and whether or not they may be grouped with the UKLP requires careful analysis and may differ, depending on the nature and holding of their interest.