Windfall tax’ on extraordinary UK oil and gas profits receives Royal Assent

The Energy (Oil and Gas) Profits Levy Act 2022 received Royal Assent on 14 July 2022 and introduces a new tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf (the Levy). The Levy applies in addition to Ring Fence Corporation Tax (RFCT) and Supplementary Charge to Corporation Tax (SCT).

The legislation retains the key features of the draft legislation, which were outlined in our previous article, subject to certain changes as outlined below.

Petroleum Revenue Tax (PRT) repayments

An important change from the draft legislation is that repayments of PRT are now left out of account in calculating the profits subject to the Levy to the extent that the amount is referable to the decommissioning part of the PRT loss that generates that refund.

This change addresses a key tax asymmetry in the draft legislation whereby the calculation of profits subject to the Levy excluded decommissioning expenditure but PRT refunds arising from the same expenditure were subject to the Levy.

Meaning of ‘disqualifying purpose’ for the purposes of the investment allowance

The investment allowance includes an anti-avoidance provision such that expenditure is not treated as investment expenditure where it has been incurred for a ‘disqualifying purpose’.

A ‘disqualifying purpose’ existed in the draft legislation where the main purpose, or one of the main purposes of the arrangement was securing a relevant Levy advantage. This has been updated in the legislation and for a ‘disqualifying purpose’ to exist in respect of an arrangement it must also be reasonable, taking into account all the relevant circumstances:

• To conclude that the arrangements are, or include steps that are, contrived, abnormal or lacking a genuine purpose; or
• To regard arrangements as circumventing the intended limits relating to the relief.

The purpose of this change is to ensure that arrangements with a genuine purpose are not unintentionally caught by the anti-avoidance rules.

Period to which the Levy applies

The Levy is temporary and applies to profits arising in accounting periods beginning on or after 26 May 2022 and ending on or before 31 December 2025. The Financial Secretary to the Treasury acknowledged in responses to questions during the second reading of the Bill in Parliament that it was rare to include such a sunset clause and that its inclusion was to underline that the Levy is a temporary measure.

Whilst not included in the legislation, it has been indicated that the Levy may be phased out earlier if oil and gas prices return to historically more normal levels prior to 31 December 2025. In a response to a question in Parliament during the second reading of the Bill on whether historically more normal prices can be defined, the Financial Secretary to the Treasury repeated the former Chancellor’s comments that the average Brent price over the last five to ten years is $60 to $70 a barrel which should give a sense of what would be considered historically normal.

Next steps

As the legislation has now received Royal Assent, companies should consider the following:

• The timing of both current and planned expenditure given the additional deduction available for qualifying investment expenditure for the purposes of the Levy, taking account of the anti-avoidance provisions in the legislation;
• Those with accounting periods straddling the commencement and/or ending date should consider how to calculate a ‘just and reasonable’ apportionment of profits; and
• The tax accounting implications of the Levy, in particular the deferred tax implications of any qualifying investment expenditure and any Levy losses.

For further information please contact:

• Claire Angell

• Amy Hunt