Yesterday, the Chancellor announced the recently anticipated, following significant political pressure, tax rise on the profits of companies that produce oil and gas from the UK and UK Continental Shelf. It does not apply to other energy sector players, such as the producers of green energy, as had been predicted in the Press.

Rather than increase the rates on existing taxes the Chancellor chose to introduce a new oil and gas tax called the Energy Profits Levy. The Energy Profits Levy is effective immediately and will be charged at a rate of 25%.

The Levy will be temporary and will be phased out if oil and gas prices return to “historically more normal levels” and in addition the legislation will include a sunset clause which will mean the tax is abolished from the end of 2025 at the latest.

The new Levy will be applied to “UK oil and gas profits”, which means ring fence profits from UK and UK Continental Shelf production subject to a number of adjustments. One of the stated adjustments being leaving finance costs out of account as for SCT.  However, the RFCT and SCT profits to which the new Levy is applied will not be reduced by brought forward tax losses, nor decommissioning costs. Any “Levy” losses can however be augmented by the Levy allowance and will be available for carry back under normal CT rules (without the extended ring fence carry back), carry forward, and group relief, against other Levy profits.

It is not clear if the Levy will apply to ring fence capital gains, although that would have little economic logic given the Levy is only due to apply for a short period of time, and the value generating a capital gain will be representative of all future profits. As such this could create a big disincentive to assets moving hands into companies wanting to invest while the Levy is in place, and it is hoped that the exclusion of capital gains will be one of the “number of adjustments”.

The Levy will be payable along with the three instalments for RFCT and SCT, although for December year end companies the first payment will not be until January 2023.

Also announced is a new investment allowance. We believe this applies to expenditure incurred from today. The additional investment allowance appears to operate solely to give relief against the new Levy, albeit at an 80% rate. It will be given on top of the capital allowances relief that will reduce the profits on which the Levy is charged. 

The new investment allowance was described by the Treasury as meaning tax relief of more than 91p for each pound invested when combined with existing reliefs. This is made up of RFCT relief of 30p, SCT relief of 10p, SCT investment allowance relief of 6.25p, Levy relief of 25p, and Levy allowance relief of 20p. However, this rate of relief only applies if a company is already paying CT and SCT, and therefore reduces to 45p where a company has brought forward tax losses. If companies were still investing in PRT fields which had paid tax in the past the relief would be more than 100% of the costs.

Overall, the Chancellor referred to the measures providing an extra £5bn in tax in the next year.

CW Energy Comment:
"These changes will be very unwelcome news to both upstream companies and the wider supply chain. 

Companies which have invested in new projects that have just started to produce will be particularly hard hit as their past investment costs will not be deductible against the new Levy.

As soon as further details are announced, CW Energy will provide further analysis."

KeyFacts Energy Industry Directory: CW Energy