The rate of the Energy (Oil and Gas) Profits Levy (EPL) will be increased from 35% to 38%, bringing the headline rate of tax on upstream oil and gas activities to 78%, the UK government has announced. The levy will also be extended to 31 March 2030.
According to a policy paper published by HM Treasury, the “unjustifiably generous” main investment allowance of 29% will also be removed from 1 November. Qualifying expenditure incurred prior to 1 November will not be affected and will continue to qualify for relief. The government will also reduce the extent to which capital allowance claims can be taken into account in calculating levy profits.
The 80% decarbonisation investment allowance will remain unchanged. The government has also confirmed that there are no plans to change the availability of capital allowances in the main capital allowances regime. The changes are being introduced in line with the new government’s manifesto commitments and will support the UK’s clean energy transition.
Jake Landman, energy tax expert at Pinsent Masons, said: “It is positive that the government has indicated it will engage with stakeholders before providing more detail on its proposals to restrict allowances at the Budget on 30 October. Therefore, oil and gas producers should be seeking out opportunities to engage with the Treasury over the coming weeks and watching closely for further details”.
“Given the very limited time between the Budget and the introduction of the rate increase, those impacted should start giving consideration now to the issue of apportionment for the relevant accounting period,” he said.
The EPL was introduced in May 2022 to tax the extraordinary profits of oil and gas companies operating in the UK and on the UK Continental Shelf. The levy was originally due to expire at the end of 2025 but has been extended several times. Earlier this year, the previous Conservative government announced the extension of the EPL until 2029. The levy may end earlier, if oil and gas prices fall to thresholds detailed in the UK’s Energy Security Investment Mechanism.
Jamie Robson, also an energy tax expert at Pinsent Masons, said: “It is welcome – although unsurprising – that that the decarbonisation investment allowance remains untouched. It is also reassuring that the government recognises the need for certainty across the oil and gas industry and the difficulties created by repeated recent changes and has announced its intention to work with the industry and others to develop and implement a successor regime for responding to future price shocks.”
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