Policy paper

Energy Profits Levy: Decarbonisation Allowance

Published 15 March 2023

Who is likely to be affected

Oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS) that are investing in decarbonising their oil and gas production.

General description of the measure

This measure introduces an 80% investment allowance in the Energy Profits Levy (EPL) for qualifying expenditure on decarbonising upstream oil and gas production.

Policy objective

This measure is intended to provide an incentive for oil and gas companies to invest in decarbonisation of upstream oil and gas production, in order to support the oil and gas sector’s target to reduce greenhouse gas emissions by 25% in 2027 and 50% by 2030, which are key commitments in the North Sea Transition Deal in the transition to Net Zero by 2050.

Background to the measure

The EPL was introduced from 26 May 2022 to tax the exceptional profits of oil and gas companies operating in the UK and on the UKCS. This recognised that profit levels in the sector had increased significantly due to very high oil and gas prices caused by global circumstances, including Russia’s invasion of Ukraine. To maintain the incentive for companies to invest in oil and gas production to support the UK’s energy security, the EPL included a generous 80% allowance against the levy based on investment expenditure. The tax was due to expire on 31 December 2025.

At the Autumn Statement, with oil and gas prices forecast to remain above historically normal levels, the Chancellor announced changes to the EPL. These changes included a rate increase from 25% to 35%, extending the time that the tax applies to 31 March 2028 and reducing the rate of the investment allowance to 29% for all investment expenditure other than in decarbonisation. The reduction in the rate of the investment allowance maintains the overall cumulative cash value of the relief following the rate increase to 35%, reflecting that it will have more value against a higher levy rate. These changes were legislated for in the Finance Act 2023 and took effect from 1 January 2023.

The Chancellor also announced that from 1 January 2023 qualifying investment expenditure on decarbonisation of upstream production will be eligible for a higher expenditure allowance at 80%, instead of the 29% allowance. This is to be legislated for in the Spring Finance Bill 2023 and is the subject of this note.

Detailed proposal

Operative date

This measure applies from 1 January 2023.

Current law

The levy was introduced by the Energy (Oil and Gas) Profits Levy Act 2022 with effect from 26 May 2022. Section 2 of that Act, as amended by section 2 of Finance Act 2023, sets out the rules for the existing investment allowance.

Proposed revisions

In section 2(3) of the Energy (Oil and Gas) Profits Levy Act 2022 a new rate of investment allowance set at 80% will be added for decarbonisation expenditure. New section 2A will provide the meaning of decarbonisation expenditure which is broadly capital expenditure on assets relating to:

• Powering oil and gas production facilities from non- fossil fuel sources, and
• Reduction or elimination of flaring and venting of greenhouse gases.

Summary of impacts

Exchequer impact (£m)

The Exchequer impact of the EPL (including the decarbonisation allowance measure) was published at Autumn Statement 2022, set out in Table 5.1 of Autumn Statement 2022 and was certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Economic impact

Whilst this investment allowance measure will encourage some companies to bring forward or increase planned investment, it is only expected to have limited macroeconomic impacts.

Impact on individuals, households and families

There are not expected to be impacts on individuals as this measure only affects businesses.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure will have an impact on up to around 200 companies operating in the UK or on the UK Continental Shelf. Impacted companies may pay a lower tax bill by claiming tax relief through the 80% decarbonisation allowance.

The measure is expected to have a negligible administrative impact for those affected companies. One-off costs will include familiarisation with these changes and continuing costs could include calculating the allowance when preparing accounts. Customer experience is expected to remain broadly the same following these changes to the levy as it does not significantly alter how businesses interact with HMRC.

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

Operational impact (£m) (HMRC or other)

HMRC operational changes for this measure are negligible.

Other impacts

It is estimated that this more generous allowance will incentivise companies to increase investment in decarbonisation of upstream production, reducing harmful greenhouse gas emissions and supporting government’s Net Zero Strategy and the industry’s transition to Net Zero by 2050.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from companies’ tax payments and returns.

Further advice

If you have any questions about this change, please contact: oilandgaspolicy@hmrc.gov.uk.