Oil and gas firms hit first as UK chancellor amends PE tax regime

Chancellor of the exchequer Rachel Reeves announced plans to make mandatory exemptions from UK tax for profits and losses attributable to UK-based companies that conduct part of their operations through overseas permanent establishments (PEs).

Under current rules, companies can choose to exempt their overseas PE profits and losses or, broadly, leave the PE within the UK tax net – with the result that profits and losses arising are, as a starting point, subject to, or relievable against, UK tax.

Early stage ventures can often generate losses which may be set-off against profits including of a wider UK group, in the usual way for UK losses.

However, under the new rules all profits and losses attributable to overseas PEs would be exempt from 1 January 2027 – with this date being brought forward to 1 September 2026 for companies involved in oil and gas exploration or exploitation.

The government’s view is that the current system allows for the use of such early stage losses but is not appropriately capturing subsequent profits for various reasons, explained Pinsent Masons tax expert Jamie Robson, who added the chancellor’s changes will have a wider impact than just oil and gas companies, but they would be the first to feel the full impact .

“Overall, the aim appears to be to create what the government see as a better match for the UK Exchequer between the taxation of overseas profits and relief for losses, so that both profits and losses are outside of the UK tax net, with the key result being that early stage losses would no longer be available within the UK,” he said.

“However, this represents a significant structural change in respect of the UK taxation of overseas permanent establishments.  

“In the short term, it is to be hoped that the government is persuaded that losses that have already arisen can be preserved and carried forward as businesses will have been expecting – but in the long term, such businesses are likely to take measures such as this into account when determining from where to make significant capital investments across the world.”

Under the changes, which are expected to be included in draft legislation over the summer, any UK-resident companies with overseas PEs which are conducting oil and gas exploration and exploitation would be prevented from offsetting any losses from their PEs against their UK profits, with accounting periods for these companies deemed to now end 31 August 2026. It should also be the case that profits attributable to those PEs should be exempt from UK corporation tax after that date, through the application of the automatic exemption.

According to the plans as announced, losses from years before the exemption takes effect will not be available for offsetting or relieving UK profits of either the company or a wider group after 1 September, along with anti-avoidance rules being introduced to prevent efforts to accelerate the use of losses ahead of the cutoff. The detail of the legislation remains to be seen.

“Currently, some oil and gas groups that operate overseas through foreign branches have structured their tax affairs in a way which ensures they pay little or no corporation tax on their UK energy trading profits,” Reeves told the House of Commons as she announced the new measures.

“Today we are putting an end to this practice. We expect these reforms to raise hundreds of millions of pounds a year and fund the package of measures set out today, with costings certified by the OBR forecast in the usual way,”