UK Government announces ‘windfall tax’ on extraordinary oil and gas profits

The Government has announced a ‘windfall tax’ on UK oil and gas profits to partly fund cost-of-living support to UK households.

The Government has announced a ‘windfall tax’ on UK oil and gas profits to partly fund

On 26 May 2022  the Government announced a new tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf. The Energy Profits Levy (the Levy) will be charged at 25 percent and apply to profits arising on or after 26 May 2022. The oil and gas sector is currently subject to a 40 percent headline rate of tax on UK ‘ring fence profits’ consisting of 30 percent Ring Fence Corporation Tax (RFCT) and 10 percent Supplementary Charge to Corporation Tax (SCT). The Levy will therefore increase the headline rate of corporation tax on oil and gas sector UK profits from 40 percent to 65 percent. As evidenced by levels of activity following previous rate increases, these announcements will reduce the attractiveness of investment in the UK at a time when energy security and funding the energy transition are front and centre of the political agenda. As such the Chancellor also announced a ‘super-deduction’ style investment allowance to provide an immediate incentive for the oil and gas sector to invest in UK extraction and to support energy security. The Chancellor announced that the Government will urgently evaluate the scale of ‘extraordinary profits’ in the electricity generation sector to determine ‘appropriate steps’, implying we may see further announcements over coming months.

The measure is temporary and will be phased out when oil and gas prices return to historically more normal levels. The legislation will also include a sunset clause which will remove the Levy after 31 December 2025.

The tax base for the Levy will be computed in a similar manner to RFCT and the SCT, applying to a company’s ring fence profits, with the following applying:

  • Levy losses may be: (i) carried back for 12 months against previous levy profits (three years for terminal losses); (ii) carried forward to set against future levy profits; and (iii) group relieved in year to another company with levy profits;
  • No relief for existing RFCT or SCT losses;
  • No deductions for decommissioning costs;
  • No deductions for finance costs (akin to SCT); and
  • An investment allowance will be available for certain expenditure (operating and leasing expenditure) at a rate of 80 percent.

Companies who have an accounting period that straddles 26 May 2022 will be required to apportion their profits.

The Levy will be included in the RFCT three-instalment payment regime for large companies, although for accounting periods that straddle the commencement date, the levy payment for that straddling period will be made in the final instalment payment.

Additional boxes will be added onto the CT600 to report Levy profits and how much Levy is payable. Companies will be required to submit supporting information on the amount of Levy payable.

The Levy is expected to raise £5 billion in its first 12 months which will be used to partly fund a range of cost-of-living measures. These include one-off payments to some of the most vulnerable households in the UK and doubling the October 2022 discount on energy bills for all UK households from £200 to £400, with the requirement to repay this now dropped