A loophole that allowed gas and electricity distribution companies to claim tax relief for costs 'already paid for by business customers' has been closed.

The Treasury's new legislation in the guise of the 'Contribution allowances: plant and machinery: Finance Bill 2013 draft legislation' was introduced on Wednesday and comes into immediate effect.

The amended law will prevent organisations and 'gas and electricity distribution companies in particular' from making new claims for historic costs dating back decades that have already been paid by their business customers.

The utility companies' previous practice was not to claim capital allowances for costs already covered by business customers. However, the Treasury said that since January this year some suppliers had sought to make new capital allowance claims worth £50m which, if successful, would generate large windfall tax repayments and reductions for the companies concerned. It calculates that up to £900m of tax revenue could be at risk.

Chancellor of the Exchequer, George Osborne said: '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.'

The legislation makes amendments to section 538 of the Capital Allowances Act 2001 (CAA) to confirm that contribution allowances under Part 2 are available in relation to a contribution of a capital sum to capital expenditure on the provision of plant or machinery in the recipient's hands. The contributor's capital contribution is then treated as capital expenditure on the provision of plant or machinery for use in the contributor's business, and it is the contributor who can claim capital allowances, not the recipient.

The draft legislation, introduced on 29 May, will be introduced in the current Finance Bill 2013.