(Photo: Reuters)
(Photo: Reuters)

The UK Treasury has sealed up a tax loophole which allows energy companies to claim money back from their tax bills against installation costs.

British Chancellor George Osborne revealed that new legislation will come into immediate effect and be introduced in the current Finance Bill.

It will prevent gas and electricity distribution companies, in particular, from making new claims for historic costs that have already been paid by their business customers.

The claims date back decades and cost Britain around £900m (€1.1bn, $1.4bn).

"The government is committed to competitive taxes to support growth in the UK. But it is also only right that companies pay the tax they owe," said Osborne in a statement.

"It is completely unacceptable that utility companies think they can claim for huge amounts of money, that business customers have already covered the cost for. By legislating today, we will prevent utility companies from making these claims, ensuring fairness for British taxpayers."

Energy companies have a variety of ways to legally avoid tax. In this particular case, utility companies were attempting to change previous practice of claiming capital allowances for costs already covered by business customers.

The UK Treasury said that energy firms attempted to change that and make new claims for past expenditure.

If they succeeded, it would generate large windfall tax repayments and reductions for the companies concerned.

Some energy companies entered the spotlight recently for its tax avoidance methods.

In April this year, RWE npower chief executive Paul Massara gave evidence to the Energy and Climate Change Select Committee, the energy company did not pay UK corporation tax between 2009 and 2011 because of the "very simple reason that [we] invested hundreds of millions of pounds in building power plants, creating jobs, creating employment and help[ed] to keep the lights on."

Massara defended npower's lack of tax payments for this period and said that "this is in no way tax avoidance, and all of our business is taxable in the UK" because the "simple accounting UK rule" meant that investment could be used to reduce the group's tax liability.

"If this country wants to get £110bn (of capital invested then... you are going to need to allow people that deductibility," he added.