Draft legislation published for the Energy Profits Levy

Draft legislation has been published for the new Energy Profits Levy that was announced by the Chancellor last month.

Draft legislation has been published for the new Energy Profits Levy that was announced

The Government has issued draft legislation for the Energy (Oil and Gas) Profits Levy (the Levy or EPL). This Bill will introduce the 25 percent surcharge on profits realised by UK oil and gas companies. This levy is in addition to ring fence corporation tax (RFCT) at 30 percent and the supplementary charge to corporation tax (SCT) of 10 percent, bringing the headline tax rate for oil and gas exploration and extraction activities in the UK and UK Continental Shelf to 65 percent. The draft legislation is consistent with the announcements made in May but provides more information on the operation of the Levy and confirms the Government’s position on areas of uncertainty, such as the treatment of petroleum revenue tax (PRT) refunds and the treatment of hedging contracts and transitional arrangements. It is expected that the Bill will receive Royal Assent before the summer recess.

The legislation uses existing RFCT rules to determine taxable profits and then makes modifications for the purposes of EPL. The key features included within the Bill are as follows:

  • Rate – the Government indicated that this might be reduced if oil and gas prices returned to historically normal levels, however the legislation does not include a mechanism for this to happen automatically;
  • Investment allowance – a deduction, in addition to the capital allowances available, will be available at 80 percent of qualifying expenditure;
  • Qualifying expenditure includes capital expenditure and leasing expenditure. Operating expenditure will also qualify if it improves recovery from an oil field or increases tariff receipts and is not routine repair and maintenance expenditure. Only new expenditure will qualify, purchases of second hand plant and machinery do not qualify;
  • Non-deduction of financing costs – the drafting to prevent a deduction being taken for finance costs is the same as that which prevents a deduction for finance costs for the purposes of calculating profits chargeable to SCT;
  • Non-deduction of decommissioning – no deduction is available for decommissioning expenditure, which is defined by reference to the Capital Allowances Act 1992;
  • Utilisation of EPL losses – losses generated for EPL purposes can be surrendered to group companies for utilisation against their EPL profits. A group for EPL purposes uses the same 75 percent definition as used in other group relief rules. A claim can also be made to carry EPL losses back one year (three years on the cessation of trade) otherwise EPL losses are carried forward and used in future periods. Carried forward EPL losses cannot be group relieved;
  • Non-utilisation of ring fence losses – RFCT and SCT losses arising in the same period, or brought forward from earlier periods, cannot be used to reduce EPL profits;
  • PRT refunds – refunds of PRT arising from decommissioning losses carried back against historic PRT profits will be subject to EPL in the period in which the refund is received;
  • Hedging – the Bill does not include any adjustments in respect of commodity hedges, for EPL purposes these should follow the same treatment as for RFCT;
  • End date – the legislation includes an end date for the levy of 31 December 2025; and
  • Transitional arrangements – where an accounting period straddles the start or end date of the levy, profits and losses should be apportioned on a just and reasonable basis. This could be a subjective exercise and one we expect HMRC to scrutinise.

The consultation on the draft legislation is only open for one week until 28 June 2022. The Government intends the Bill to receive Royal Assent by mid-July.