Energy (Oil and Gas) Profits Levy
Published 11 July 2022
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Who is likely to be affected
Oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS).
General description of the measure
The UK oil and gas fiscal regime taxes profits earned by companies from the production of oil and gas in the UK and on the UKCS. The regime is kept separate to other taxes on commercial profit by the operation of a ‘ring fence’ which prevents losses from other activities being imported into the regime.
This measure introduces a new, temporary 25% levy on ring fence profits of oil and gas companies. This is in addition to Ring Fence Corporation Tax which is charged at 30% and the Supplementary Charge which is charged at 10%. This takes the headline rate of tax from 40% to 65%.
The levy also includes a new 80% investment allowance which will be available to companies at the point of investment on qualifying expenditure.
Policy objective
With oil and gas prices rising substantially over the past year due to global circumstances, there has been a significant increase in profits earned from UK oil and gas extraction. Oil prices have nearly doubled since early last year and gas prices have more than doubled. Following these record high prices, the government is introducing the Energy (Oil and Gas) Profits Levy, a new 25% levy on the extraordinary profits the oil and gas sector is making. The revenue raised by the levy will help fund additional support on the cost of living.
The government has also been clear that the UK will continue to require oil and gas during the transition to Net Zero, and that it wants to see the oil and gas sector reinvest its profits to support the economy, jobs, and the UK’s energy security. To encourage this, a new ‘super-deduction’ style investment allowance is being introduced within the levy to provide an immediate incentive for the oil and gas sector to invest in UK extraction.
Background to the measure
On 26 May 2022, the previous Chancellor announced a package of targeted measures to help support households with the rising cost of living. To help fund this package, and in light of extraordinary profits in the oil and gas sector, the previous Chancellor also announced the Energy (Oil and Gas) Profits Levy.
Draft legislation was published on 21 June 2022 for technical feedback.
Detailed proposal
Operative date
This measure takes effect for accounting periods beginning on or after 26 May 2022. The legislation includes a sunset clause, which will remove the levy after 31 December 2025.
Current law
This is new legislation and there is no current law on the levy. However, the legislation draws from similar concepts from the existing ring fence tax regimes in Part 8 of Corporation Tax Act 2010.
Proposed revisions
The Energy (Oil and Gas) Profits Levy Bill establishes the new levy in legislation.
The clauses set out that the levy will apply to a company’s ‘ring fence profits’, computed with a number of adjustments, and will be charged as if it were an amount of corporation tax. The main adjustments are:
- finance costs are left out of account
- decommissioning costs are left out of account
- loss relief will be available within the new levy, but there will be no cross over to any other ring fence taxes
- ring fence Corporation Tax losses cannot be used to reduce profits subject to the new levy — no historic losses will be allowed to be carried forward into the levy regime
- the 80% investment allowance which is generated on investment expenditure (capital expenditure and some operating and leasing expenditure) can be immediately used to reduce profits subject to the levy
Summary of impacts
Exchequer impact (£million)
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| Empty | Empty | Empty | Empty | Empty | Empty |
This measure is expected to raise around £5bn in its first 12 months at current market prices. The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at the next fiscal event.
Economic impact
Increases in taxes can weigh on economic activity. This measure is structured to incentivise the affected companies to increase their investment. Overall, taking into account these counterbalancing effects, the measure is not expected to have a significant macroeconomic impact.
Impact on individuals, households and families
There are not expected to be impacts on individuals as this measure only affects businesses. Energy prices are set globally and the UK producers are price-takers therefore their impact on global prices is minimal. This means that the new measure is unlikely to affect domestic energy prices.
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 temporary 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 more tax but may also receive tax relief through the new allowance.
The temporary measure is expected to have a negligible administrative impact for those affected companies. The new levy is an extension of Corporation Tax and therefore reported and paid in the same way as Corporation Tax. One-off costs will include familiarisation with the new levy and continuing costs could include keeping records and calculating liability to the new levy. A further continuing cost could include having to provide minimal additional information each year as part of the normal Corporation Tax return as long as the levy remains in force.
Customer experience is expected to remain broadly the same. However, companies will also have to submit information to HMRC for Corporation Tax instalment payments to show the amount of levy included. Guidance will be issued in due course.
This measure is not expected to impact on civil society organisations.
Operational impact (£million) (HMRC or other)
HMRC costs for this new levy are currently estimated at £5million. However, further work is being undertaken to finalise full HMRC costs.
Other impacts
Environmental impacts have been considered. While no substantive impact on territorial UK oil and gas consumption is anticipated, with the introduction of the new super-deduction style investment allowance to provide an immediate incentive for the sector, the government does expect the levy to generate an overall increase in oil and gas investment in the UK. Whether there are wider carbon impacts, will depend on the nature of investment decisions taken by the companies. For example, this could include investment in decarbonisation projects.
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, contact: matthew.weightman@hmrc.gov.uk or nicola.garrod@hmrc.gov.uk.
Declaration
The Right Honourable Lucy Frazer QC MP, Financial Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.