The UK government has announced today that it will be introducing a price floor that affects the application of the energy profits levy. A windfall tax applicable to UK upstream oil and gas activities, the levy (or ‘EPL’) was introduced with immediate effect in May last year and increased to its current rate of 35% with effect from 1 January (see our previous article). Together with the existing ring fence corporation tax and supplementary charge (at an aggregate 40%), it brought the marginal rate applicable to oil and gas production in the UK to 75%.
New floor mechanism
Under today’s announcement EPL will remain in place until its existing end date of March 2028, but a new 'Energy Security Investment Mechanism' will be introduced, such that EPL will be disapplied if prices return to an average of both $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters.
This market-wide floor mechanism can be contrasted with the approach on the electricity generator levy, which also has a price floor but works by applying only to in-scope receipts of a particular company or group above an indexed £75/MWh. There is the obvious possibility of EPL remaining applicable while either oil prices or gas prices individually fall below the respective thresholds. These have been set using 20-year historic averages based on data from the World Bank for oil and Independent Commodity Intelligence Services for gas. The government notes that the last time average prices were below this level were March 2021 for gas and August 2021 for oil, and that current OBR projections suggest that EPL will not actually be affected by the proposed changes before it ends in 2028. Obviously if this were the case, the direct impact of today’s changes would be limited.
When originally announcing EPL, the government had said the tax would be removed when prices returned to historically normal levels, but – unlike the extended end date of 2028 – this was not reflected in statute. This change could be seen in part as legislating for this previous, extra-statutory statement (which may be helpful if it means lenders are no longer required to assume that EPL will apply to projected prices below the relevant thresholds).
Once details are available, there will need to be careful consideration of the exact timing of the application and disapplication of EPL, as well as the associated impact on reliefs, including the enhanced investment allowances available against the levy. This will be particularly true given the significant difference in rates between EPL applying or not applying to any given period or part-period. The extent to which projections of future tax liability for various purposes will now also need to take into account future market prices – even where these do not directly impact the prices for the relevant taxpayer – will also need to be considered.
Review of Oil and Gas Fiscal Regime
The government has also announced today the terms of reference for its review of the UK fiscal regime applicable to oil and gas (available here). The review will be led by HM Treasury, together with HMRC, the NSTA and the Department for Energy Security & Net Zero. Engagement with the industry will begin shortly, and the report is expected by the end of the year.
If you have any questions regarding the application, please do contact Philip Reid or your usual CMS contact.