The UK Government announced on May 26, 2022 its intention to introduce with immediate effect a temporary Energy Profits Levy (the “Levy”), an additional UK Corporation Tax charge at a rate of 25% on the profits of oil and gas companies earned from oil and gas extraction in the UK and the UK Continental Shelf.
This comes after several months of speculation and political wrangling as to whether the UK should introduce such a measure.
It is expected that a bill introducing the implementing legislation will be tabled shortly, effective from the May 26, 2022 announcement date. While as a formal matter this legislation will therefore take effect retrospectively, it is relatively common in relation to UK fiscal changes, particularly in areas of urgency (or anti avoidance), for legislation to take effect in this way where a policy announcement is sufficiently detailed and states that the policy will be implemented effective from the date of the announcement.
The Levy is the UK Government’s response to the increasing pressure faced by UK households resulting from pronounced increases (and in particular the dramatic increases in the costs of energy and fuel), and the resulting pressure faced by the UK Government from the political opposition and consumer groups to introduce a levy that the UK Government originally indicated it was unwilling to introduce so as not to stifle investment in the oil and gas sector. Against this backdrop, the UK Government’s stated justification of the Levy is as a way to “help fund more cost-of-living support for UK families using the ‘extraordinary profits’” being made by oil and gas producers. The announcement anticipates that the measure will raise £5 billion in its first 12 months. While the legislation will contain a formal sunset clause effective at the end of December 2025, the announcement states that the UK Government will phase out the Levy if oil and gas prices return to historically more normal levels in the future.
Prior to the introduction of the Levy, oil and gas companies paid UK tax on profits from the extraction of oil and gas in the UK and the UK Continental Shelf at an overall headline rate of 40% (consisting of the Ring Fenced Corporation Tax rate of 30% and a Supplementary Charge of 10%, although there are differences in how the tax base for the two charges is calculated). Following the introduction of the Levy, that headline rate has increased to 65%. In comparison, the standard UK corporation tax rate paid by other businesses is 19%, due to rise to 25% in April 2023 (although this has also been subject to speculation).
Affected companies will be unable to offset existing losses or decommissioning expenditure against profits subject to the Levy but, in a move to make the measure more palatable to the sector and to spur reinvestment, a new 80% investment expenditure allowance is available. In conjunction with existing reliefs applicable to capital expenditure in connection with oil and gas extraction, the Levy allowance provides a 91-pence saving (up from 46.25p) for every £1 of qualifying expenditure. The Levy allowance is available to reduce the current tax charge when the expenditure is incurred, in contrast to an investment allowance provided for elsewhere in the UK oil and gas tax regime which provides the benefit of the allowance only at the time that income resulting from the investment is received. The Levy allowance, which has been criticized as being too generous by the Institute of Fiscal Studies, has provided some reassurance to the sector, which was taken by surprise by the potential multi-year life of the Levy.
Implementing legislation for the Levy is expected to be introduced to Parliament shortly.
While the Levy focuses on profits from “upstream” oil and gas activities, the announcement notes that certain parts of the electricity generation sector have also seen extraordinary profits. The UK Government indicates it will urgently evaluate the scale of these profits and the appropriate steps to take, in parallel to a separate consultation with the power generation sector on measures to ensure fair energy pricing for consumers.
A special thanks to Ira Aghai for his contribution to this publication.