Policy paper

Relief for payments made into a Carbon Capture Usage and Storage Decommissioning Fund

Published 30 October 2024

Who is likely to be affected

Oil and gas companies that operate in the UK or on the UK Continental Shelf.

General description of the measure

The measure gives tax relief for payments made into decommissioning funds when the payment is associated with the transfer of an asset from an oil and gas company to a Carbon Capture Usage and Storage company. The measure also exempts from the Energy Profits Levy the related payments made by the Carbon Capture Usage and Storage company to the oil and gas company in respect of those transferred assets.

Policy objective

The government is committed to the creation of a UK Carbon Capture Usage and Storage industry to help achieve the UK’s net zero ambitions. This measure removes a tax barrier which oil and gas companies have indicated would prevent the transfer and repurposing of suitable assets from use in oil and gas, such as pipelines and platforms, for use in Carbon Capture Usage and Storage. Using repurposed oil and gas assets is a much cheaper and more sustainable alternative for the Carbon Capture Usage and Storage company than building new assets.

The Department for Energy Security and Net Zero has enacted legislation that requires oil and gas companies to pay the current cost of decommissioning into a decommissioning fund for the asset’s future decommissioning. Under current tax legislation, no relief is available for such payments where it would have been should they choose to decommission the assets rather than sell them for Carbon Capture Usage and Storage use. By allowing relief for payments of this kind, this measure enables companies to repurpose their assets without being financially disadvantaged relative to decommissioning the assets themselves.

Background to the measure

This measure was announced at Autumn Statement 2023 by the previous government.  Legislation was introduced in Autumn Budget 2024.

Detailed proposal

Operative date

The measure will have effect on and after the date of Royal Assent to the Finance Bill 2024-25.

Current law

The current law is included in Chapter 13 of Part 2 of the Capital Allowances Act 2001, section 3 of the Oil Taxation Act 1975, section 330C of the Corporation Tax Act 2010 and section 1 of the Energy (Oil and Gas) Profits Levy Act 2022. Under the current law, expenditure will not be eligible for tax relief unless it is incurred in decommissioning the assets as defined under the relevant provisions.

Proposed revisions

The measure will treat qualifying payments into a decommissioning fund as though those payments were incurred on actual decommissioning and therefore qualified for tax relief.

For Petroleum Revenue Tax such payments will be treated as expenditure incurred in decommissioning a qualifying asset with section 3(1) of the Oil Taxation Act 1975.

For Ring Fence Corporation Tax such payments will be treated as general decommissioning expenditure falling within section 163 of the Capital Allowances Act 2001.

For Supplementary Charge such payments will be treated as decommissioning expenditure falling within section 330C of the Corporation Tax Act 2010.

For the Energy Profits Levy decommissioning expenditure is not an allowable deduction and therefore to ensure parity of treatment with actual decommissioning spend, payments into a decommissioning fund will be treated as decommissioning expenditure falling within section 9(3) of the Energy (Oil and Gas) Profits Levy Act 2022.

Regarding receipts for transferred assets received by the oil and gas company, the Energy Profits Levy legislation will be amended to specifically exclude such receipts from the computation of Energy Profits Levy profits. Section 1(5) of the Energy (Oil and Gas) Profits Levy Act 2022 will be amended to achieve this.

Summary of impacts

Exchequer impact (£ million)

The fiscal impacts for this measure have been combined with the fiscal impacts relating to the Energy Profits Levy reforms 2024. 

These two measures have been costed separately and the cost and yield estimates have been combined to protect commercially sensitive information relating to specific taxpayers used in the Carbon Capture Usage and Storage costing. The cost of relief for the Carbon Capture Usage and Storage changes is a very small proportion of the overall costings.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

There is no indirect or direct impact on individuals as this measure only affects businesses. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will have a negligible impact on around 200 businesses by expanding the definition of qualifying decommissioning expenditure. One-off costs could include familiarisation with the new legislation. 

This measure will have no customer experience impacts as it does not impact the way these businesses interact with HMRC.

This measure is not expected to impact on civil society organisations. 

Operational impact (£ million) (HMRC or other)

It is anticipated there will be no HMRC operational impacts for this change other than new guidance written for the Oil Taxation Manual.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, contact the oil and gas policy team at oilandgaspolicy@hmrc.gov.uk.