Policy paper

Energy Profits Levy – Technical Note

Updated 15 June 2022

Introduction

On 26 May 2022 the Chancellor announced a new tax on the profits of oil and gas companies operating in the UK and the UK Continental Shelf . It will increase the headline rate of tax on those profits from 40% to 65%. The new levy will have built in a generous allowance which will reward those companies who invest in oil and gas production.

Commencement

The Energy Profits Levy will apply to profits arising on or after 26 May 2022. Companies who have an accounting period that straddles that date will be required to apportion their profits. It 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 tax after 31 December 2025.

How the tax will operate

The Energy Profits Levy will be charged at 25%. The tax base will be computed in a similar manner to the existing taxes which apply to oil and gas companies: Ring Fence Corporation Tax and Supplementary Charge. The levy will be included in the three instalment payment regime for large companies – although for accounting periods that straddle the commencement day, the levy payment for that straddling period will be made in the final instalment payment.

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 adjustments are:

• finance costs are left out of account. This will mirror the provision that already exists for the calculation of adjusted ring fence profits for Supplementary Charge
• decommissioning costs are left out of account. This will ensure that extraordinary profits are not reduced by decommissioning expenditure
• an investment incentive. An ‘allowance’ will be generated on investment expenditure (capital expenditure and some operating and leasing expenditure) at 80% which can immediately be used to reduce profits subject to the levy. This allowance will operate similarly to the existing Supplementary Charge investment allowance, but a key difference will be that the allowance generated will not be required to be activated by relevant income, and can be used to create or augment a levy loss. As with the Supplementary Charge investment allowance, there will be restrictions on the generation of allowance on the acquisition of an asset which has already been in receipt of allowances in the ring fence.
• loss relief will be available within the Energy Profits Levy, but there will be no cross over to any other ring fence taxes. Levy losses will be capable of being relieved through i) carry back of 12 months against previous levy profits (3 years for terminal losses), ii) carried forward to set against future levy profits, and iii) group relief in year to another company in the group with levy profits
• RFCT losses cannot be used to reduce profits subject to the Energy Profits Levy. No historic losses will be allowed to be carried forward into the levy regime. This ensures that levy profits are not reduced by historic losses. Loss relief for RFCT and SC remains unchanged

Additional boxes will be added onto the CT600 to report levy profits and how much levy is payable, and companies will be required to submit information on the amount of levy payable.

Next steps

The government will shortly introduce a Bill to legislate for the Energy Profits Levy.

Contact

For any questions please contact nicola.garrod@hmrc.gov.uk or matthew.weightman@hmrc.gov.uk