Autumn Budget 2024 – changes to the Oil and Gas tax regime

The UK government announced in today’s Budget that the energy profits levy (or ‘EPL’) applicable to UK oil and gas profits will be increased from its current rate of 35% to 38% from tomorrow, and the period for which the levy applies will be extended to 2030. The investment allowance available since EPL was introduced has also been removed, other than for expenditure on decarbonisation (for which it will be retained, but with the allowance reduced to 66% to maintain its existing cash value).

While these changes will further increase the tax burden on the sector, also of significance is a change not being made: 100% first-year capital allowances will remain in place for EPL. It had been suggested by the government previously that tax reliefs in relation to EPL could be curtailed, which had caused widespread concern across the industry in relation to capital allowances. The lack of change here may therefore be seen as welcome, while noting that it is only retaining an existing long-standing feature of the UK regime (and one that aligns with the general corporation tax regime following the introduction of full expensing in 2023).

The Budget also notes the intention of the government to consult in early 2025 on the long-term (ie post-EPL) regime in relation to future price-shocks.

Outside of EPL, it was announced that tax relief will be made available within the UK oil and gas tax regimes for contributions made to decommissioning funds on carbon capture usage and storage projects, where the plant and machinery concerned has been used for upstream activities.

EPL increased to 38%

The energy profits levy was introduced as a ‘windfall tax’ in May 2022, and is charged on profits from oil and gas in the UK in addition to the existing ring fence corporation tax (at a current rate of 30%) and supplementary charge (at 10%). When introduced, the levy was charged at 25%, but this was increased to 35% from 1 January 2023, meaning the aggregate headline rate was 75%. Various costs are also denied for the purposes of EPL – including financing costs, decommissioning costs and losses incurred prior to the introduction of EPL – which has meant the impact of EPL has varied significantly for those operating on the UK continental shelf depending on where in the field and investment lifecycle their assets happen to be.

EPL will now be increased from 35% to 38% with effect from tomorrow (1 November 2024), resulting in an aggregate headline rate of 78%.

EPL Extension to 2030

The levy will also be extended to 31 March 2030. This represents a two-year extension from the current legislative end date – although the previous Conservative government had announced it would extend it to 2029 – and pushing it beyond the end of the next parliament. The 'energy security investment mechanism' introduced earlier this year will remain. This mechanism provides that the levy will fall away early if market prices for both oil and gas fall below index-linked thresholds for two consecutive quarters. When it was announced, it was stated that the Office of Budgetary Responsibility did not expect this to occur during the then-lifetime of the levy to March 2028. It is noteworthy that recent oil prices (but not gas prices) have been around the relevant threshold. If it does not fall away, the temporary windfall tax announced in 2022 will have been in place for nearly eight years.

Investment allowances

When EPL was introduced, the government sought to avoid the dramatic increase in rate having an adverse impact on investment in the UK continental shelf by also introducing a new investment allowance, which provided an uplift on qualifying expenditure against EPL. Following the increase to a 35% rate, this allowance gave a 29% uplift for general qualifying expenditure, and an 80% uplift for expenditure on decarbonisation. The 29% allowance will now be removed for costs incurred after 1 November 2024: though given the long timeline for investment, companies are likely already to have committed to incurring costs after this date. The decarbonisation allowance will be retained, but with the uplift reduced to 66%.

Consultation on long-term regime

The Budget also mentions that the government will consult in early 2025 on how the oil and gas tax regime responds to price shocks once EPL ends. In addition, it states that ‘after a period of change, the government also recognises the importance of providing the oil and gas industry with long-term certainty on taxation’. Given the changes over recent years, a movement towards stabilising the long-term regime and giving investors greater could certainly be helpful: although any changes will be subject to detailed scrutiny, and it suggests it may be unlikely we will see a return to the regime as it was before the windfall tax was introduced.

Relief for contributions to CCUS decommissioning funds

Measures will be introduced providing that where plant and machinery used by a company within its upstream business is repurposed for a carbon capture usage and storage project, and the company makes a contribution to the decommissioning fund for the project, it will be entitled to tax relief within the ring fence and petroleum revenue tax regimes at the time the contribution is made. This is intended to address a potential commercial barrier to the reuse of such equipment, given it may otherwise have been more cost-effective to decommission the plant and machinery than to repurpose it and not obtain relief.

It appears the relief will be available as if the amount contributed to the fund were decommissioning expenditure for the purposes of section 163 Capital Allowances Act 2001, section 330C Corporation Tax Act 2010 and section 3(1) Oil Taxation Act 1975. This will presumably allow the cost of contributing to the fund to be carried back and trigger repayments in a similar manner to actual decommissioning costs. Such amounts will also be treated as decommissioning expenditure for EPL purposes, the effect of which is that they will not be deductible against EPL; but provision will also be made for receipts from the transfer of such assets to not be subject to EPL.