The UK government has today announced a 10% increase in the energy profits levy applying to profits from UK oil and gas activities, taking it from 25% to 35%. The end date for the levy has also been extended from December 2025 to March 2028.
The energy profits levy was announced in May this year with immediate effect and legislated for in the Energy (Oil and Gas) Profits Levy Act 2022 in July. The further increase in rate announced today will take effect from 1 January 2023, with the relevant legislation being included in the Finance Bill 2023.
Calculation of the levy
The energy profits levy applies in addition to both ring fence corporation tax (at a current rate of 40%) and the supplementary charge (at 10%), so with today’s increase will result in a headline rate of 75% on profits from UK oil and gas.
The levy is broadly charged on the same profits as are subject to ring fence corporation tax, but with certain key modifications:
- Financing costs are not deductible for the purposes of levy profits (in the same way as for the 10% supplementary charge).
- Decommissioning costs are not deductible for the purposes of levy profits.
- Losses arising prior to the date of the levy’s introduction cannot be used to reduce levy profits; there is instead a standalone regime for losses that can be used for EPL purposes.
A factsheet published by the government today specifically confirms that the latter two modifications above will remain in place; it does not mention the first, though does not otherwise suggest that this will be subject to change.
These modifications mean that the extent to which a taxpayer is affected by the levy may be heavily dependent on their circumstances, including where the oil and gas interests they own are in their life cycle. Companies or groups with late-life assets requiring decommissioning, or that have incurred significant expenditure prior to May 2022, are more likely to be paying EPL than those with current development stage assets that are incurring significant costs (particularly given the uplifted investment allowance mentioned below). Today’s changes will increase the proportion of the overall tax charge that is subject to these modifications (and the time for which this is case).
The introduction of the energy profits levy was accompanied by a specific investment allowance, which gives an additional 80% deduction against the levy for qualifying expenditure. When combined with the existing regime, this results in tax relief of 91.25p for every £1.00 of relevant expenditure.
Following today’s announcement, the amount of this additional deduction will be changed to 29% with effect from 1 January 2023. Once the higher rate of EPL is taken into account, this will produce a similar result as the current allowance, with relief of 91.40p for every £1.00 for qualifying expenditure.
The 80% deduction will though be retained for decarbonisation expenditure – which will mean tax relief of 109.25p for every pound spent – with a view to encouraging investment in carbon emissions reducing technology. Specific examples given by the government include modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power installations or running electricity cables to installations from shore.
The levy was originally announced as a temporary measure, and a ‘sunset clause’ was included in the legislation such that it would cease to apply on 31 December 2025 without further government intervention or legislation being required. The date for the levy ceasing to apply has now been extended to 31 March 2028, which will presumably be a simply legislative change to the existing sunset provisions.
It had also been suggested by the government that the levy may be phased out earlier if oil and gas prices returned to “historically more normal levels” before the levy was due to expire. This concept was not included in the original legislation, and the government have today explicitly confirmed that the levy will stay in place until the revised date of March 2028.