The Chancellor of the Exchequer, Jeremy Hunt, noted in the Autumn Statement (see United Kingdom-1, News 17 November 2022) that with effect from 1 January 2023, the rate of the energy profits levy will increase to 35%. The levy will apply until March 2028.
The government believes that businesses in the energy sector are making extraordinary profits and therefore the energy profits levy (EPL) has been extended to operate until the end of March 2028, with a rate increased from 25% to 35% from 1 January 2023. The levy (commonly called a "windfall tax") applies to profits generated by oil and gas exploration and production companies. It was introduced in May 2022, because oil and gas prices had risen following the Russian invasion of Ukraine.
The increased EPL will apply in addition to the 40% tax already being paid by oil and gas companies, which consists of:
- the 30% ring fence corporation tax on profits from exploration and production in the UK; and
- the 10% supplementary charge on adjusted ring-fence profits, excluding finance costs.
Consequently, a total rate of 75% will apply from 1 January 2023. Furthermore, previous losses or decommissioning expenditure cannot be set against profits subject to the EPL.
Since the levy is rising from 25% to 35%, the previous 80% EPL investment allowance will be reduced to 29% so, when combined with the 100% first year capital allowance eligibility, the overall relief for expenditure will remain substantially the same. In fact, to support the government's net zero strategy, there is an 80% investment allowance for decarbonization expenditure. This will mean that for every GBP 100 spent on such costs, total tax relief of GBP 109.25 will be obtained.
The government had previously stated that if oil and gas prices return to historically more normal levels, the EPL would be phased out. However, it now says that this will not happen before the planned end date of March 2028, saying that this will give "companies greater certainty to plan their investments".