This note reflects the law at 31 July 2024 and the measures announced in the Policy Paper issued on 29 July and expected to be included in the Budget to be held on 30 October 2024.
Energy Profits Levy (EPL) is a temporary levy introduced with effect from 26 May 2022 on the profits of companies producing oil and gas in the UK or on the UK Continental Shelf. It was introduced to capture a perceived windfall for industry arising as a result of the significant increase in oil and gas prices during 2022 primarily as a result of the Russian invasion of Ukraine.
The Levy applies to company’s ring fence profits and is charged as if it were an amount of Corporation Tax. The ring fence tax base is adjusted to disallow financing and decommissioning costs. Petroleum revenue tax repayments attributable to losses generated by decommissioning expenditures are not chargeable to the Levy, but other PRT repayments are brought in. Certain expenditures are uplifted in calculating the tax, the uplift being termed additional expenditure, as set out below.
The rate of Levy was set at 25% for profits arising from 26 May 2022 to 31 December 2022 and 35% for profits arising from 1 January 2023 to 31 March 2028. It was announced on 29 July that the levy will now run until 31 March 2030 (subject to the ESIM) and that the rate will be increased to 38% from 1 November 2024. Where a company has an accounting period which straddles the relevant commencement, rate change or end dates, the periods before and after the relevant date will be treated as separate accounting periods and profits must be apportioned on a just and reasonable basis between the periods.
A so called Energy Security Investment Mechanism (ESIM) was included in the spring 2024 Finance Bill. This measure will end the Energy Profits Levy early if the 6-month average price for both oil and gas is at or below the ESIM threshold prices. The ESIM threshold prices are 71.40 dollars per barrel for oil and £0.54 per therm for gas. These thresholds are based on a 20-year average to the end of 2022. These thresholds will be adjusted from 1 April 2024, and annually thereafter, by the preceding December’s Consumer Prices Index figure. This measure was included in Finance Act (No 2) 2024 and the new Labour government have announced that they intend to retain this measure.
Currently a first year allowance is available on most capital expenditure for CT SCT and EPL.
The government also announced in their Policy Paper on July 29 that they intend to:
“reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits”.
It is unclear what form these restrictions will take but government have indicated that they will consult with industry in advance of finalising this measure.
An allowance or uplift is available where a company incurs qualifying “investment expenditure”.
Capital expenditure will qualify as investment expenditure. In addition, certain operating expenditure aimed inter alia at increasing the rate at which, or the number of years for which oil can be produced, will qualify. Finally certain lease payments in respect of leases with a term of at least 5 years will qualify for the uplift.
The rate of uplift is 80% for expenditure incurred from 26 May 2022 to 31 December 2022 and 29% from 1 January 2023 to 31 March 2028. It was also announced in July that this uplift will be abolished in respect of expenditure incurred after 1 November 2024.
An uplift is to be maintained for decarbonisation expenditure but it is unclear whether the rate of 80% which applies for expenditure incurred on or after 1 January 2023 will be preserved.
As with the basic EPL deduction, financing or decommissioning costs do not qualify for uplift. There are also rules to prevent relief for second hand expenditure and anti-avoidance rules to prevent relief where expenditure is incurred for a disqualifying purpose, which targets certain arrangements where one of the main purposes of the arrangements is to secure a levy advantage.
The relief is not field specific and unlike the SCT Investment allowance the amount of uplift is automatically deducted in calculating the levy profit or loss. This is an aspect that could be changed in the next Finance Bill.
CT losses are not deductible for EPL purposes. Instead, the scheme has its own loss regime dealing with Levy losses generated on or after 26 May 2022.
Any qualifying Levy loss may be carried forward or back or group relieved against levy profits subject to the normal CT rules. A Levy loss can be offset against the profits of the previous 12 months, with the carry back extended to 3 years in the case of a “terminal loss”. Unrelieved qualifying levy losses can be carried forward to subsequent levy periods and set off against levy profits so long as the company continues to carry on the ring fence trade.
A separate Levy group relief regime applies which also mirrors the CT regime. Change in ownership and transfer of trade restrictions apply.
Collection and management of EPL follows rules of Ring Fence Corporation Tax (RFCT) in respect of returns, payments, enquiries, assessment, information powers, penalties, interest and appeals.
A new return, the so called ‘Quantification Notice’ is required to be submitted to HMRC specifying the amount of EPL payment included within any payment of corporation tax made, the accounting period it relates to, UTR number and the expected date of payment. Failure to meet the notification requirement can lead to initial penalty of £300 followed by daily penalties up to £60.