Rishi Sunak’s address to the House of Commons on Thursday 26 May contained the announcement of the Energy Profits Levy on the UK oil and gas sector.

Current Regime for UK Oil & Gas

The fiscal regime taxes profits earned by companies from oil and gas production on the UK Continental Shelf. It is a separate “ring fenced” regime that prevents losses from other activities being imported into the regime. The current headline rate of tax is 40% made up of:

  • Ring Fence Corporation Tax (RFCT) at 30% – Tax on profits from exploration and production, calculated largely on the same basis as normal Corporation Tax rules.
  • Supplementary Charge (SC) at 10% – additional charge on profits calculated on the same basis as RFCT but not allowing for the deduction of finance costs.
  • Petroleum Revenue Tax (PRT) at 0% – a field based tax on profits arising on fields given development consent before 16 March 1993. The rate has been 0% since 2016 but it was not abolished because companies can carry back losses arising from trading and decommissioning to receive a rebate of previously paid PRT.

An existing investment allowance available on capital expenditure can also be claimed when the investment starts to generate income and reduces the taxable profit on which the SC is paid. This investment allowance is at a rate of 62.5%. In addition, a 100% first year capital allowance is available on capital expenditure.

The impact of these allowances is that companies can claim relief for 46.25% of the total capital expenditure.

This is calculated as:

Tax Rate Type of Relief Relief Rate Amount of relief
(based on £1 million expenditure)
RFCT 30% First year allowance 100% £300,000
SC 10% First year allowance 100% £100,000
SC 10% Investment allowance 62.5% £62,500
Total Relief 46.25% £462,500

 

Proposed Energy Profits Levy and new Investment Allowance

Energy Profits Levy

  • An additional 25% tax on UK oil and gas profits. The total tax rate will therefore increase from 40% to 65%.
  • Companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy.
  • Takes effect from 26 May 2022.
  • If oil and gas prices return to historically more normal levels, the Energy Profits Levy will be phased out, and there will be a sunset clause in the legislation, effectively ending the Energy Profits Levy on 31 December 2025.
  • The levy does not apply to the electricity generation sector. However, the government is consulting with the power generation sector as parts of this sector have also seen extraordinary profits partly due to record gas prices.

Investment Allowance

  • A ‘super-deduction’ style allowance to incentivise the oil and gas sector to invest in UK extraction.
  • Investment Allowance rate is 80%.
  • Available at the point of investment rather than when the investment starts to generate income.

The impact of this additional allowance is that companies can claim relief for 91.25% of the total capital expenditure.

This is calculated as:

Tax Rate Type of Relief Relief Rate Amount of relief
(based on £1 million expenditure)
Energy Profits Levy 25% First year allowance 100% £250,000
Energy Profits Levy 25% Investment allowance 80% £200,000
Additional Relief 45% £450,000
Existing Relief 46.25% £462,500
Total Relief 91.25% £912,500

 

Operis has reviewed several financial models relating to oil and gas projects. With its knowledge of the UK oil and gas regime, the Tax & Accounting team can help assess the impact of these changes on oil and gas projects in the UK.

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