HM Treasury published a policy paper yesterday, which sets out some details on the changes that are intended to be introduced to the Energy Profits Levy (“EPL”). The policy paper can be found here:
This publication of this policy paper was not expected as most considered that no news would be forthcoming before the Budget (now set for 30 October 2024).
Capital allowances
The most unwelcome and potentially far-reaching change was in respect of the ability to deduct capital expenditure against EPL profits. The policy paper included the following:
“..the government will also reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits.”
What this means is unclear. Treasury officials have stated that this will be the subject of an informal consultation process before the final proposals are announced at Budget.
The paper did confirm that there would be no change to the way capital allowances are claimed for ring fence corporation tax and supplementary charge purposes.
Other changes
Other announcements in the policy paper were more expected:
- Increase in the rate of EPL to 38%;
- Reset of the sunset clause to 31 March 2030. This means that the sunset clause has moved back from being 2025 when EPL was first introduced, to 2028 at Autumn Statement 2022, to 2029 in Spring Statement 2024 and now to 2030;
- Retain decarbonisation investment expenditure rules (the assumption is the 80% rate of uplift will be maintained);
- Abolish the increased deduction for general investment expenditure (currently provides additional relief of 29%).
Date of implementation of changes
There were some that feared that these changes could be implemented on a retrospective basis. However, that has proved not be to the case as these changes are to have effect from 1 November 2024. Expenditure incurred before this date may still qualify as investment expenditure and the current level of capital allowance.
Comments
Industry and representatives from the Labour Party had been meeting in the run up to the election in order to seek to inform Labour of the significant impact on activity of any change that reduced the ability for companies to obtain full relief for capital expenditures. However, it appears work still needs to be done. Whilst the changes may increase the EPL take in the short term a collapse in investment will ultimately lead to a fall in government revenues, particularly as the changes also risk the advancement of decommissioning which will accelerate tax repayments that government will have to fund.
The continuing lack of any certainty as to the fiscal regime means companies will be reticent to make decisions on projects.
These changes may also represent an impediment to transactions. For example, there is the risk that any consideration allocable to capital allowance assets would be taxed at 78% but with potentially no equal and opposite relief for the acquirer.
CW Energy
30 July 2024