UK and International Tax news
Government To Introduce An Energy Profits Levy
Tuesday 31st May 2022
The government has announced it is to introduce the Energy Profits Levy, a new 25% surcharge on the profits of oil and gas companies, but not to the electricity generation sector.
Oil and gas prices have risen substantially, with oil prices nearly doubling over the past year, and gas prices more than doubling, resulting in significant increases in profits earned from UK oil and gas extraction.
The new Energy Profits Levy will raise around £5bn over the next year which will go towards supporting people with the new cost of living measures announced by the Chancellor.
The Levy will be an additional 25% tax on UK ring fence oil and gas profits on top of the existing 40%, comprising of 30% Ring Fence Corporation Tax and 10% Supplementary Charge, taking the combined rate of tax on profits to 65%. Companies will however not be able to offset finance costs, previous losses or decommissioning expenditure against profits subject to the levy.
The Levy will apply to profits arising from 26 May 2022 and will be legislated for via a standalone Bill to be introduced shortly. The government has said that in future years, if oil and gas prices return to historically more normal levels, it will phase out the Levy. The legislation will include a sunset clause, which will remove the Levy after December 2025.
The government has also announced that within the levy, there will be a new ‘super-deduction’ Investment Allowance to encourage firms to invest in oil and gas extraction in the UK. The new 80% Investment Allowance will mean businesses will be able to claim a further 45p tax saving [FYA of 25% plus IA of 20%] giving a total 91p of tax saving for every £1 of investment.
The government expects the combination of the levy and the investment allowance to lead to an overall increase in investment, and the OBR will take account of this policy in their next forecast.
Whilst the levy will not apply to the electricity generation sector, and as set out in the Energy Security Strategy, the government is consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production. Those reforms will take time to implement. In the meantime, the government has said it will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take.
If you would like further information on the proposed levy, please contact Keith Rushen on 0207 486 2378
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