Yearly Archives: 2023

22 Nov 2023

Autumn Statement 2023

The Chancellor delivered the Autumn Statement 2023 today.  We summarise below the announcements that were made on the specific rules that apply to UK upstream oil and gas companies.

Energy Security Investment Mechanism (‘ESIM’)

The Government announced today that the ESIM, through which the Energy Profits Levy (EPL) will be terminated early in the event oil and gas prices fall below a threshold, will be legislated.  It also clarified how those threshold prices would be measured.

The ESIM was announced earlier this year without any undertaking to legislate the termination of the EPL. Today’s announcement reflects the industry’s request for certainty.

The ESIM will trigger the abolition of EPL from the last day of the 6-month rolling reference period when both oil and gas average prices in the six months have fallen below the threshold.

The announcement clarifies the pricing sources and the methodology for arriving at the average.

Currently, the threshold prices are $71.40/barrel for oil and £0.54/therm for gas. These threshold prices will be indexed annually from 1 April 2024 using the preceding December’s Consumer Prices Index.

Outcome from the Oil and Gas Fiscal Review

During the Summer, the government conducted a review of oil and gas taxation.  The outcome of this review and summary of responses was published today.  There are two main areas covered being:

  • Tax regime design for oil price “shocks”; and
  • Payment to decommissioning funds and tax treatment of assets repurposed for Carbon Capture, Usage and Storage (‘CCUS’)

Tax regime design for oil price “shocks”

The government stated that it was recognised that there was a need for certainty and predictability in the oil and gas fiscal regime.  But also noted that in periods of high oil prices the nation needed a “fair return”.  Therefore, where there are “unusually high oil and gas prices the government will develop a new mechanism that could be used to respond to such price shocks post-2028”. The government have given an undertaking to provide details of how “price shocks” are to be defined before EPL is abolished.

The government is signalling that they understand that the introduction of the EPL was a “shock” tax rate rise and was not helpful for the industry, stating that the mechanism should work in a “more predictable way, in order to not deter investment”.

There are no details on how such a mechanism could be framed but that the “government will need to consider a range of factors before deciding whether to introduce such a mechanism, including the economic and fiscal context of the day.”

Outside of these high oil price periods, the review stated that the government considered the tax regime to be effective with limited scope for simplification changes.

Payment to decommissioning funds and tax treatment of assets repurposed for CCUS.

At Spring Budget 2023, it was announced that legislation will be introduced in a future Finance Bill that will establish “the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of oil and gas assets for use in CCUS projects”.  At that time, there was no further detail included, so it was not clear what tax treatment is being proposed.

At Autumn Statement, it was announced “targeted support for the energy transition through allowing relief for payments made by oil and gas companies into decommissioning funds in relation to oil and gas assets that are repurposed for use in Carbon Capture Usage and Storage”.  The support consists of two measures:

  • Provides for tax relief where oil companies make a payment to a decommissioning fund. Under current law, relief is only available at the time that decommissioning expenditure is incurred when the decommissioning work is carried out, and
  • Remove from the charge to EPL any “receipts” that are received when an asset is repurposed for use in a CCUS project. Receipts will remain subject to RFCT and SCT.

It was noted that the government “did not receive sufficient evidence on any other significant barriers to the energy transition in the oil and gas tax regime in order to justify further changes in the oil and gas tax regime” but acknowledged this will be kept under review.

This leaves repurposed CCUS assets subject to a 40% clawback.


Legislating the ESIM is a welcome response to the industry’s concerns, but for those companies anticipating EPL losses to be used on carry-back, an early end to EPL will deny them relief. It is disappointing that the government has rejected the request by industry for the thresholds to reflect indexed historical prices.

The Oil and Gas Fiscal Review has not provided anything tangible at this stage with respect to the design mechanism for oil price “shocks”, and therefore, the industry will need to continue to engage in shaping the design of any mechanism.  Many will be comforted that the current fiscal regime has been found to be effective so that there appears to be limited risk for further changes.

The CCUS announcement leaves a potentially significant roadblock in place where an asset is sold, and receipts are still to be subject to 40% taxation.  Perhaps further changes may be acceptable to the government as the precise framework of the CCUS contracting structures is further developed.

CW Energy LLP

November 2023


10 Jul 2023

Scope of the ring-fence decision published

Court of Appeal decision published in the Royal Bank of Canada case

In March 2022. we published a newsletter on the Upper Tribunal (‘UT’) decision that considered whether an oil and gas “royalty” interest held by a non-UK resident (Royal Bank of Canada (‘RBC’)) gave rise to ring-fence income and whether the relevant treaty allowed HMRC to tax the income.

The UT decided in favour of HMRC, and RBC was held to be liable to UK ring fence corporation tax on receipt of the payments, notwithstanding the Canada/UK tax treaty. Our newsletter on the UT decision can be found here:

RBC has since appealed against that decision. The Court of Appeal heard the appeal in May, with the decision published on 21 June 2023.  The Court of Appeal found unanimously for the taxpayer and overruled the decision of the UT.  The leading judgement was delivered by Lady Justice Falk (a former Freshfields tax partner).

Application of the Canada/UK tax treaty: Nature of RBC’s rights

RBC succeeded in its argument that the receipts were not income derived from immovable property: they were not rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. RBC had never held the underlying immovable property.

The Court of Appeal was not persuaded by earlier judgements that the precise legal structure should be looked through to the commercial arrangements saying:

“That legal structure cannot simply be ignored on the basis of some broader concept of commercial or economic reality.”

As the right to work the Buchan field was contained in the licence interest and that interest was never held by the former owner or RBC it could not be said that the payments were received by RBC in consideration for that “right to work”. The Court of Appeal held that the characteristic of the former owner of the right to receive payments did not pass to RBC.  That meant the payments should not be taxed as either income or capital gains due to the application of the treaty.

Some of the UK’s treaties will provide similar protection to that provided by the UK-Canada treaty. However, where the treaty includes an offshore activities article, it is likely that similar protection may not be available.

UK domestic law

As the Court of Appeal found that the UK had not reserved its taxing right, that dealt with the matter under appeal, and Lady Justice Falk said she would “prefer not to express a concluded view” on the UK domestic law position.  However, she also made it clear that she was not necessarily supportive of the position of the lower courts by stating:

“it is not clear to me that an interest in a proportion of sale proceeds from oil of the kind in issue here can properly be described as “the benefit of” the oil, as opposed to being a benefit deriving from proceeds of sales of oil made by BP or Talisman.”

Comments on deduction of royalty payment

Where the payments of this nature have not been structured as instalments of capital, it is common in the industry for ongoing payments to be treated as deductible.  HMRC clearances have been obtained routinely following this treatment which is included in published HMRC guidance on taxation of deferred consideration.

However, this judgement included comments in respect of the tax treatment of the company making such payments:

“…it would ordinarily be expected that the consideration paid, including the Payments, would form part of BP’s acquisition cost for chargeable gains purposes. For whatever reason, HMRC appears to have taken a different approach and to have treated the Payments made, initially by BP and then by Talisman, not as part of their acquisition cost of Sulpetro’s interest in the Buchan field but as deductible revenue payments. I cannot comment on the possible basis for that, but what is clear is that the fact that a particular tax treatment has been afforded to the payer and has subsequently given rise to a concern about the impact of those deductions on the UK tax take.., cannot determine the tax treatment of the payee.”

We believe that these comments simply reiterate the established position that a payer’s tax treatment is not relevant when considering the tax treatment of the payee and should not be read as providing precedent on the deductibility or otherwise of royalty payments.


As the Court of Appeal has decided the case without the need to consider the domestic law taxing provisions in detail and has overruled the lower courts, this seems to leave the UK domestic law position without binding case law precedent on the fundamental issue of whether a royalty of this kind is an oil right.  There are, however, arguments and views included in the judgements which may be useful in determining how a future court may rule on these matters. In this sense, whilst the decision in the judgement was reached based on a narrow treaty point, the case does potentially have wider relevance for payers and recipients of royalties of this kind generally, including UK resident recipients.

HMRC may seek to seek leave to appeal this decision to the Supreme Court so this may not represent the final position.

CW Energy LLP
July 2023

04 Apr 2023

UK Upstream Oil and Gas Tax

Transfer Pricing Documentation – requirement for larger businesses for accounting periods commencing on or after 1 April 2023

Companies that are members of multinational groups (“MNE”) with annual consolidated revenue of €750 million or more will be required to maintain transfer pricing records.

The records will be specified under a Regulation that has yet to be published but HMRC have already announced that it will require records that conform to those specified in the OECD requirements for Local and Master files. The draft Regulation contained an exception for transactions where both parties are subject to UK CT unless one of the parties carried on a ring fence trade. It is anticipated the draft rules will not be altered significantly in the final Regulation.

The Master File contains information on the MNE’s business. The main components are:

  • sources of turnover,
  • supply chains,
  • intra-group service arrangements
  • capabilities of individual locations of services in the group
  • transfer pricing policies
  • geographic markets of the MNE
  • brief functional analysis of the value added by individual companies and their risks and assets
  • details of strategies and operations linked to intangibles and R&D and the transfer pricing applied
  • details of the financing of the MNE, identification of MNE companies with financing functions and the transfer pricing policies applied
  • list of all unilateral advance pricing agreements

The Local File contains information on the particular company. The main components are:

  • management structure, organisation and jurisdiction
  • description of business and competitors
  • connected party transactions- details of type, value, counterparties and jurisdictions
  • Intercompany agreements
  • comparability and functional analysis for each type of connected party transaction
  • details of the transfer pricing analysis applied
  • information on comparable third party transactions used in the transfer pricing analysis
  • list of unilateral and bi-lateral advance pricing agreements affecting the connected party transactions

A penalty will be chargeable for a failure to maintain the records. Currently this is set at £3000.

Affected companies will need to bear in mind that HMRC will be able to request the documentation and there are penalty provisions for failing to comply.  

CW Energy can assist affected companies in meeting these new obligations.

31 Mar 2023

Decarbonisation Allowance

As reported in our Newsletter of 15 March, the increase in the rate of Energy Profits Levy (‘EPL’) to 35% is accompanied by a new decarbonisation allowance to reduce profits charged to EPL. 

The allowance will be generated at a rate of 80% of the qualifying expenditure as opposed to the 29% rate that applies to other investment expenditure and the Finance Bill  contains the draft legislation.

In all cases the expenditure that generates the allowance must be capital in nature. There must be a main purpose of reducing the emissions of greenhouse gases.

The expenditure that qualifies is then restricted to that which falls broadly into one of two categories:

  1. Expenditure on equipment aimed at supplying facilities used in the ring fence trade with electrical power from the grid or power generated from a non-fossil fuel source.
  2. Expenditure on equipment aimed at reducing the flaring or venting of greenhouse gases, capturing such gases or monitoring such emissions.

Given the uncertainty on the application of  the ‘main purpose’ test CW Energy approached HMRC and have received confirmation that the test can be met for both new and existing field developments.

The allowance is potentially valuable but applying the tests to particular expenditure can be challenging. We understand that HMRC intend to share draft guidance on the new relief in due course. 

Whilst it is possible that the Bill’s wording will change, CW Energy can offer clients an early indication of their entitlement to the decarbonisation allowance.

15 Mar 2023

Spring Budget 2023

The Chancellor delivered Spring Budget 2023 today.  There were two announcements on the specific rules that apply to UK upstream oil and gas companies.

Decarbonisation allowance

The increase in the rate of Energy Profits Levy (‘EPL’) to 35% announced in the Autumn Statement 2022 was accompanied by a new decarbonisation allowance.  This allowance would be more generous than the allowance applied to other investment expenditure. Where expenditure qualifies an additional 80% of that expenditure can be deducted from profits that are subject to EPL, as opposed to the 29% rate (from 1 January 2023) for other investment expenditure.  Consultation has been ongoing over the past few months seeking to clarify what sort of expenditure should qualify. 

A policy paper was published alongside the Budget documents setting out that legislation will be introduced so that decarbonisation allowance should be available in respect of:

“…decarbonisation expenditure which is broadly capital expenditure on assets relating to:

  • Powering oil and gas production facilities from non- fossil fuel sources, and
  • Reduction or elimination of flaring and venting of greenhouse gases.”

We expect that the actual legislation will be included in the Spring Finance Bill 2023 which is due to be published on 23 March 2023 and the measure will be effective from 1 January 2023.

HMRC has shared draft legislation with Industry for comment and we will be reviewing this over the next few days.

Decommissioning funds and Carbon Capture, Usage and Storage (‘CCUS’)

The policy and support framework for how companies will invest in CCUS projects has been developing.  As part of that framework there is an expectation that decommissioning of infrastructure will be funded by contributions to a funded decommissioning programme. During the consultation it was noted that the tax treatment of contributions should be clarified.

At Spring Budget 2023 it was announced that legislation will be introduced in a future Finance Bill (i.e. not the Spring Finance Bill 2023) that will establish “the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of oil and gas assets for use in CCUS projects”.

There was no further detail included so it is not clear what tax treatment is being proposed.  It is hoped that where a contribution is made by an oil and gas company in respect of its oil field infrastructure a deduction against ring fence profits will be available as the funds are alienated.

Minimum foreign tax – Pillar 2

In addition to these oil and gas measures, it was confirmed that UK legislation to introduce Pillar 2 of the OECD Inclusive Framework will be included in the Spring Finance Bill 2023 and will have effect for groups with accounting periods beginning on or after 31 December 2023.

A more comprehensive note on those rules will be included in a later Newsletter.


Many will be disappointed that there were no broader statements from the Chancellor on changes to EPL.  As oil and gas prices lower, many had hoped (and some had expected) that we would hear some acknowledgement from the Chancellor that there is a need to reduce or remove of EPL when oil and gas prices return to more normal levels.  It may be that companies will need to wait for the wider consultation on the tax regime that was announced at Autumn Statement 2022 for that comfort.

The detailed legislative wording for the decarbonisation allowance will need to be carefully reviewed, however, the policy paper suggests that the allowance will be available for low carbon new assets as well as spend on retrofitting old assets.

CW Energy LLP

March 2023