Energy Profits Levy: Energy Security Investment Mechanism - technical note
Published 22 November 2023
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Background
The Energy Profits Levy (EPL) was introduced on 26 May 2022 to tax the exceptional profits of oil and gas companies arising from unexpectedly high oil and gas prices. The EPL is charged at 35%, bringing the total headline rate of tax on oil and gas profits to 75%. It is due to end on 31 March 2028. The EPL applies to companies operating in the UK and on the UK Continental Shelf.
On 9 June 2023, the government announced the Energy Security Investment Mechanism (ESIM) setting out the circumstances in which the EPL would end early. It will mean that EPL will remain in place until 31 March 2028 unless oil and gas prices fall to historically normal levels for a sustained period.
On 12 June 2023, Exchequer Secretary to the Treasury Gareth Davies MP laid a Written Ministerial Statement confirming the introduction of the ESIM. This confirmed that the EPL will permanently be disapplied if average oil and gas prices are both at or below the ESIM price threshold for 2 consecutive quarters. The ESIM threshold prices were calculated using a 20-year historic average to the end of 2022 and are set at $71.40 per barrel of oil and £0.54 per therm of gas.
On 18 July, the government published a discussion note that sought views from stakeholders on the technical detail and practical application of the ESIM. This technical note sets out the process for monitoring the ESIM and how the EPL will cease if the ESIM is triggered.
At Autumn Statement 2023, alongside this technical note, the government has published a summary of responses to the discussion note.
Overview
The EPL will cease to apply from the date that the ESIM is triggered. The ESIM will trigger if the ESIM reference prices - calculated as the average price of the relevant commodity over the six-month reference period (which will always end on the last calendar day of the month) - for both oil and gas are at or below the ESIM threshold prices.
The ESIM threshold prices
The ESIM threshold prices for the 2023 financial year are:
- oil: $71.40/barrel
- gas: £0.54/therm
From 1 April 2024, and annually thereafter, the ESIM threshold prices will be adjusted by the preceding December’s Consumer Prices Index, rounded up to the nearest whole penny or cent. The government will publish updated ESIM threshold prices before the start of each financial year.
The ESIM reference prices
The ESIM reference prices will be calculated as the average prices of the relevant commodities over the reference period. The reference period is 6 calendar months, ending on the last day of each calendar month. At the end of each month, when the relevant data is available, the government will check if the ESIM has been triggered.
For oil, the government will use the World Bank’s monthly prices for Brent Crude oil (series description: Crude oil, UK Brent 38’ API).
For gas, the government will use the Independent Commodity Intelligence Services’ (ICIS) daily price for gas (series description: NBP Price Assessment Day-Ahead Bid/Offer Range Daily Outright (Bid): GBp/th).
The average prices will be the arithmetic mean, and calculated as follows:
- for oil, the government will add together the 6 relevant monthly oil prices from the World Bank and divide by 6, rounded to 2 decimal places on an arithmetical basis
- for gas, as the data is not provided on weekends and Bank Holidays, the government will add together the daily gas price for the days ICIS published data during the reference period (ie market trading days), then divide that total by the number of days ICIS published data. This final figure will be divided by 100 to convert from pence to pounds and then rounded to 2 decimal places on an arithmetical basis
The government has been monitoring oil and gas prices for the purposes of the ESIM for reference periods since 9 June 2023.
The ESIM threshold prices used to calculate whether the ESIM has been triggered will be the ESIM threshold prices in place at the end of the reference period. For example, the CPI-adjusted ESIM threshold prices for the 2024 to 2025 financial year will first apply to the six-month reference period ending 30 April 2024.
If the ESIM is triggered
If the ESIM is triggered, the EPL will cease to apply with effect from the final day of the relevant reference period (ie the EPL will no longer apply to profits accruing from the day after the end of the reference period).
If the ESIM is triggered, the government will introduce legislation to ensure the EPL ceases on the final day of the relevant reference period.
Where a company has an accounting period which straddles the new end date, the periods before and after will be treated as separate accounting periods in accordance with existing EPL legislation. This will require companies to apportion their levy profits or losses for the straddling period to the 2 separate, notional, accounting periods on a just and reasonable basis. More detail can be found in the Oil Taxation Manual and is set out at sections 16 and 17 of the Energy (Oil and Gas) Profits Levy Act 2022.
Instalment payments under the Corporation Tax (Instalment Payments) Regulations 1998 will continue to apply. Further detail can be found in the Oil Taxation Manual. Normal interest rules will apply to any under or over payment of EPL as set out at section 11 of the Energy (Oil and Gas) Profits Levy Act 2022.