1. Mod_03_12 Alignment of TSC with Revised VAT Arrangements 29 th May 2012

2. 2 Introduction – VAT Issue in the Market VAT Agreement was issued jointly by Revenue in ROI and HMRC in UK in 2007 to cover the VAT arrangements in SEM It specified that VAT would be charged based on the jurisdiction of the unit and therefore required that each Participant had a VAT registration in the jurisdiction of the unit. Issues arose in 2011 in relation to the ability of companies to register Interconnector Units in SEM where the company owning the unit was established in a jurisdiction other than where the unit was being registered. Generators are not entitled to a VAT registration in a jurisdiction where they do not have a place of establishment.

3. 3 Interim Solution It was not possible to implement changes to the VAT arrangements in advance of the April 2013 IT Release After considerable discussion, agreement was reached with both VAT Authorities that they would consider issuing VAT registrations to the affected parties on a case by case basis until April 2013 at which time the VAT registrations would expire. This would enable parties to obtain a VAT registration, register in SEM and be treated in accordance with the existing VAT Agreement.

4. 4 Enduring Solution SEMO entered into discussions with both VAT Authorities through Deloitte in relation to the treatment of Generators where the Participant was not established in the jurisdiction of the unit. Where in the past a Generator Unit was charged VAT depending on the jurisdiction of the unit while also considering cross border flows, it has now changed as follows: The place of establishment of the Generator also effects the VAT charged to Suppliers. They are proportionately charged based on where it is deemed that the generation they purchased in SEM came from, i.e. ROI, NI/UK, other EU and Non EU.

5. 5 Enduring Solution Calculations were presented to the VAT Authorities showing the effect on the place of establishment of the Generator on the VAT calculations. These calculations were agreed with the VAT Authorities on April 12 th 2012. The systems impact has been assessed based on the calculations agreed with both VAT Authorities. The system changes required to implement the Generator changes for Interconnector Units is €611k. This is being extended to all Generator Units and the estimated additional cost is 25% of the above price (total estimated cost = €765k + testing). The VAT Agreement Addendum (published with mod) was issued by HMRC on behalf of both VAT Authorities on 21 st May 2012.

6. 6 Supplier Issue The wording in the Addendum requires that Suppliers are also treated for VAT based on the participants place of establishment The calculations agreed with the VAT Authorities were based on the current treatment of Supplier Units where they are charged VAT based on the jurisdiction of the Supplier Unit. It is possible for a Supplier to be established outside the jurisdiction of the unit, however they are still entitled to a VAT number in the unit jurisdiction and so an interim solution like the one in place for Generators is not required. SEMO explained that at this stage it would not be possible to extend the changes being implemented in April 2013. The VAT Authorities have stated that ‘the necessary accounting changes, insofar as they impact on generator units, are to be effective from 1 May 2013 and for supplier units sometime after this from a date to be agreed’.

7. 7 Implications of not making VAT Changes If the system change for Generators was not implemented by April 2013, those who have received a temporary VAT number would have their VAT registration withdrawn. Any new participants in the category could no longer join SEM. This has significant implications for the SEM market as our rules may prevent participants joining the market and this may be open to legal challenge. The VAT Authorities could carry out a VAT compliance check on SEMO. If we were not to implement the system changes, this could have both legal and financial implications. The VAT Authorities have insisted that the enduring solution for Generators must be in place by April 2013 and that they will not consider extending the existing interim solution

8. 8 Questions?