The Energy Profits Levy (EPL) draft legislation has now been published for consultation. The consultation period closes on 28 June 2022.
We understand that it is intended to have EPL enacted before the Summer recess but that the EPL legislation will not be substantively enacted for accounting purposes before 30 June 2022.
The comments below reflect the current draft, but we do not expect there to be much change given the compressed legislative timetable.
As expected the EPL applies to companies with ring fence trades and profits that would be chargeable to ring-fence tax. The EPL will therefore include relevant chargeable gains and PRT refunds.
The EPL will cover profits arising in accounting periods, or deemed accounting periods, starting from 26 May 2022 and ending on 31 December 2025.
The starting point for EPL is the company’s ring-fence profit or loss for a period, which will exclude any RFES, and is then adjusted to remove:
- finance charges, determined using the SCT rules,
- CT Losses brought forward, or back,
- CT Group relief, and
- Decommissioning expenditure.
An “additional deduction” is introduced as an uplift on so-called “investment expenditure” in the period. This is calculated as 80% of the relevant expenditure and counts as a deduction in computing the EPL profit/loss of the EPL period.
The rules include a bespoke EPL loss regime. EPL losses can be carried forward or carried back one year or surrendered as “EPL” group relief against EPL profits. If the ring-fence trade ceases, “EPL” terminal loss relief rules permit a three-year extended carry back against profits within the EPL regime.
The EPL profits and losses for accounting periods which straddle the 26 May 2022 and 31 December 2025 dates are to be apportioned on a just and reasonable basis except for investment expenditure which is to be apportioned with reference to when the expenditure was actually incurred (using the specific capital allowance rules on when expenditure is incurred). Overall we believe this approach will generate less difficulty than experienced when the Supplementary Charge rate was increased in 2011, where time apportionment was the default position adopted by the law.
The 80% uplift which generates the additional EPL deduction applies to investment expenditure as defined. This is broadly the type of expenditure on oil-related activities that qualify for investment allowance within the SCT regime, but unlike the SCT investment allowance, the expenditure does not have to relate to a defined oil field or Cluster Area. There is also no requirement for it to be “activated” with production income.
The definition covers not only capital expenditure but also some leasing costs and non-routine operating costs on facilities and wells that enhance production, reserves or tariff income. As with the rule for computing, EPL profits decommissioning and financing costs are specifically carved out from the uplift regime.
However, the 80% uplift is not available on ‘second-hand’ assets. The rules here are very broadly drafted and deny the allowance on any asset where it would have been possible for an uplift to have been claimed by a previous owner of the asset, on the assumption that EPL was in place at the time that the owner incurred the relevant costs. The legislation includes as an example expenditure on the acquisition of a field interest but would appear to apply to the acquisition of substantially all second-hand assets if previously held by a ring-fence company, including exploration licences.
There is no claw-back of any uplift on a transfer/sale of an asset but the new owner will not obtain the uplift on their acquisition cost, regardless of whether the seller actually obtained such uplift.
The rules also incorporate anti-avoidance specifically in regard to the 80% uplift and EPL losses for any avoidance arrangements with the main purpose of obtaining the uplift.
The rules provide for the normal CT machinery provisions to apply, including the instalment provisions, and a requirement to notify HMRC of the amount, on or before any EPL payments are made.
Overall the draft legislation is largely as expected based on the announcements last month.
The rules are generally tightly drawn. Companies will, in particular, need to look carefully at the transitional rules. There may also be some areas where companies can plan to mitigate their exposure. There does not seem to be anything in the draft which delays the instalment payments for December year-end companies until 14 January 2013 as previously announced.
The inclusion of ring-fence capital gains and PRT repayments appear particularly anomalous. Capital gains will be based on all future profits from the licence, capturing profits to be made after the sunset date of 31 December 2025. This is likely to deter any movement of field interests unless reinvestment or other reliefs can be found. For PRT repayments there is no relation to the excess profits through high prices that the levy is designed to catch. Indeed, the loss available to carry back will have already been reduced by the current high prices and is then being taxed again. Companies will no doubt be looking closely at whether this gives rise to a claim under the DRD.
CW Energy can assist companies in planning for and complying with the EPL.
CW Energy LLP
22 June 2022