The Chancellor delivered the Autumn Statement 2022 today.
As expected the tax rate applicable to UK oil and gas profits is to be increased. The headline rate of corporation tax for UK oil and gas upstream profits is now 75%.
He also announced a new tax to be levied on some electricity generators at a rate of 45%.
Energy (Oil and Gas) Profits Levy (‘EPL’)
Increased rate of EPL
The rate of EPL is to be increased from 25% to 35%. The revised increased rate of EPL is to come into force for profits arising from 1 January 2023.
Reduction of rate of EPL uplift
The investment expenditure uplift will be reduced from 80% to 29% from 1 January 2023.
This results in effective tax relief for capital expenditures (and some operating and leasing expenditure) of 91.4%. This compares to the effective relief of 91.25% in the current regime.
The reduction in the rate of uplift whilst justified with reference to the theoretical total rate of relief means that many companies with heavy investment programmes will now pay EPL.
Decarbonisation expenditure – enhanced EPL uplift
In order to encourage oil and gas companies reduce carbon emissions, decarbonisation expenditure such as “modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power the installation or running electricity cables to the installation from shore” will keep the current 80% uplift. This could result in effective corporation tax relief for decarbonisation expenditure of 109.25%.
This appears to mean that building new infrastructure that is low carbon will not qualify for the enhanced uplift whereas retrofitting lower carbon infrastructure may qualify. Difficulties will remain for some projects as expenditures will still need to be within the ring fence regime to qualify for this enhanced uplift.
Period of EPL
The legislated end date for which EPL will apply has been extended from 31 December 2025 to 31 March 2028.
Previously government had also said that if oil and gas prices moved back to more normal levels then they would consider phasing out EPL. However, the government have now announced that they will no longer consider phasing out the levy ahead of its legislated end date and stated that this will help certainty.
Government also announced that it will engage with industry over the coming months on the long-term tax treatment of oil and gas production in the North Sea. It said that “the review will focus on delivering predictability and certainty, to support continued investment as the UKCS matures”. However, it also noted that any outcomes of the review would only be implemented after the EPL has ended.
The government has announced it will introduce legislation in an Autumn Finance Bill 2022 which presumably will mean that these changes may be substantively enacted (or indeed enacted) by 31 December 2022.
The changes related to decarbonisation expenditure will presumably take more time to work through and therefore it was announced that these will be legislated for in Spring Finance Bill 2023.
Electricity generator levy
The levy will be applied to groups generating electricity from nuclear, renewable and biomass sources. It will not apply to generators who use gas, coal, oil, hydroelectric or battery storage.
The levy only applies to generator groups that produce more than 100GWh on an annual basis. There is also an annual allowance of £10 million. Together this should remove most companies that produce electricity as an incidental source of income from the levy.
The levy is more like a royalty than a corporate income tax with revenues in excess of £75MWh being taxed at 45% without any deduction of operating or capital expenditure. The levy is not deductible from corporation tax.
The levy will apply from 1 January 2023. Government has announced it will consult with generator groups with the intention that the law will be included in the next Finance Bill.
It should be remembered that both finance costs and decommissioning expenditure cannot be deducted from EPL. Therefore for many oil companies the effective tax rate for upstream activities will be substantially higher and for some will now be above 100%.
These rules apply disproportionately to companies that have predominantly oil production as crude prices, although have shown some increase over the last year, have not risen anything like at the same rate as gas prices.
The actual burden of EPL will be sensitive to the phasing of income and expenditure within the EPL period for each company. Under existing rules, EPL losses can be carried back for only one year and will fall away after March 2028. With the extension of the application of EPL to just under six years it would have been appropriate for the loss carry back period to have been similarly extended.
The removal of the promise to abolish EPL if prices reduce may allow some companies to better plan without fear of missing out on the investment incentives. However, many others will consider the certainty of high tax rates even where prices have returned to normal as a high price to pay for that certainty and as the oil industry knows all too well tax law can be changed at any time.
Many potential investors overseas may look at two major increases to UK tax rates in under six months as a reason to believe that the UK basin is a place that has too much fiscal risk to consider incremental investment.
CW Energy LLP