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Good news for UK franchisors - Government proposes to reform complex energy tax and reporting schemes

On 28 September 2015, the government published a consultation regarding the reform of the energy tax and reporting schemes in the UK. There is a plethora of energy reporting schemes, taxes and levies On 28 September 2015, the government published a consultation regarding the reform of the energy tax and reporting schemes in the UK. There is a plethora of energy reporting schemes, taxes and levies (some of which overlap) and the aim of the reforms will be to simplify procedures to provide a more streamlined and straight-forward 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 current regime.

One key proposal is to abolish the Carbon Reduction Commitment Energy Efficiency Scheme (the "CRC") and the Climate Change Levy ("CCL") and replace with a single consumption tax. This will be interest to franchisors in the UK, whose networks may be subject to the current CRC.

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

Initially introduced in 2010 (and reformed in 2013), the CRC is aimed at incentivising companies to become more energy efficient. It is a mandatory scheme applying to businesses whose energy consumption exceeds a certain threshold (6,000MWh of qualifying electricity), with participants having to measure, 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, a franchisor is responsible for the energy supplies of its franchisees.

Franchisees are required to provide information and assistance to the franchisor, for the purposes of compliance 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 to potentially devise more energy efficient methods of production.

An exemption to 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 (for example, a multi-let building of which one of the tenants may be a franchisee) the landlord will be deemed to be the organisation who 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, to take responsibility for a franchisee's failure to provide information and to include the rather burdensome and convoluted cost-deflection clauses contained within franchise agreements. Key proposals include a single energy efficiency tax and reporting scheme (with the reporting and tax schemes based on current procedures) and further incentives to reduce carbon usage.

Rather than having split obligations (with franchisees required to pay other climate change taxies such as the CCL, whilst having to provide franchisors with similar information to report through the CRC), a streamlined procedure may allow for a simplified and less onerous requirements for franchisors and franchisees - watch this space.

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