Legislation Day: Oil and Gas Measures

There were three measures announced today as part of the Government’s “legislation day” which are particularly relevant for oil and gas companies. The first two are aimed at companies operating in the UK or on the UK Continental Shelf. The third relates to the amendment of the foreign branch exemption regime which was announced on 21 May earlier this year, which will be of particular relevance for UK companies holding overseas oil and gas activities, but has general application. Amongst the other measures announced there were important consultations published on the simplification of claiming relief from interest withholding and on pre development costs related to the installation or operation of plant following the “Gunfleet Sands” decision. These will be of interest to all companies.

1. Oil and Gas Revenue Levy

Draft legislation has been published today in relation to what was formerly known as the Oil and Gas Price Mechanism (“OGPM”).  The new regime has been renamed and is now referred to as the “Oil and Gas Revenue Levy” (“OGRL”).  It is the intention for this draft legislation to form part of the Finance Act 2027.

The OGRL will be applied at a rate of 35% on exceptional oil and gas revenues arising from ring fence trades.

The OGRL will replace the existing Energy (Oil and Gas) Profits Levy (“EPL”) and will apply from the EPL’s cessation date. EPL is currently set to cease on 31 March 2030 but may cease sooner where the conditions of the Energy Security Investment Mechanism (ESIM) are met.  

The OGRL will apply broadly as if it were corporation tax, thereby using the exiting corporation compliance architecture.

No deduction is permitted for the OGRL in computing profits or losses for corporation tax, supplementary charge, income tax or petroleum revenue tax.

Overview of the OGRL

• The OGRL will apply at a rate of 35% to “exceptional oil revenues” and “exceptional gas revenues”
• Exceptional revenues are those that arise from a company’s ring fence trade during an accounting period in excess of a threshold amount.
• The OGRL will require to be considered for each levy period (calendar month) during a company’s accounting period
• The draft legislation sets out prescribed steps to follow to determine if a company has exceptional oil or gas revenues to which 35% will be applied:
  • Step 1: Determine oil and gas revenues (considered separately)
    • Receipts in relation to the combined disposals, fairly and reasonably attributable to each month , consistently applied
    • Revenue is not determined by the accounting value of revenue which can include, for example accruals, it must be based on disposals
    • Revenues relating to nonarm’s length disposals are to be replaced using the market value rules under Schedule 3 OTA 1975
  • Step 2: Apply hedging adjustment
    • A hedging adjustment (positive or negative) must be applied to Step 1 amounts where:
      • Hedging payments and receipts can be fairly and reasonably attributed to disposals in the levy period; and
      • The principal purpose of the payment and receipt is to act as a hedge against changes in oil/gas price
      • The attribution approach adopted must be consistently applied
  • Step 3: Compute nonexceptional revenue threshold
    • For oil and gas separately, multiply the quantity of oil (barrels) or gas (therms) disposed of in the levy period by the reference price
    • The reference price is set annually and will change each financial year by reference to changes in the consumer price index (“CPI”)
    • For the financial year ending 31 March 2027, the reference price will be $90 per barrel for oil and £0.90 per therm for gas
    • HMRC will publish the reference price for oil and gas before the commencement of the financial year in question
  • Step 4: Determine the amount of exceptional oil and gas revenues (consider separately)
    • For each levy period, subtract the Step 3 benchmark value from the combined Step 1 & Step 2 value
    • If the resultant value is nil or less, the company has no exceptional oil or gas revenues in that levy period
    • If the resultant value is more than nil, the company has exceptional revenues, therefore the 35% OGRL levy will be applied
  • Step 5: Translate exceptional revenues to sterling
    • Where exceptional revenue amounts arise at Step 4 and these are not in sterling, these must be translated into sterling
    • Translation will be based on the average exchange rate for the month

A company’s OGRL liability for an accounting period is the sum of the exceptional revenue amounts (as calculated per Steps 1 – 5 above) multiplied by 35%

Tax administration

• The OGRL is treated as if it were corporation tax for in relation to returns, assessments, collection including instalments, appeals, penalties and interest

Similar to the exiting EPL quantification notice regime, a company with an OGRL liability must give notice to HMRC that such a payment is made or to be made in respect of OGRL  

2. Income from UK oil and gas rights

Draft legislation has been published dealing with the taxation of profits from oil and gas exploration and exploitation rights related to activities undertaken in the UK or on the UK continental shelf (UKCS).

Government are to legislate to negate the effect of the Supreme Court decision last year in the Royal Bank of Canada case. That case concerned the taxation of income from an UKCS oil and gas right held by a Canadian tax resident. Under UK domestic law the court held that the Canadian tax resident was potentially chargeable to UK tax on the income as the right should be regarded as a right to the benefit of oil produced on the UKCS. However, the Supreme Court found that the tax payer was protected under the UK Canada double tax treaty. This treaty does not contain an offshore activities article. The Canadian company did not have an actual p.e. in the UK and the court held that the amounts were not income from immovable property.

UK law is to be changed to deem income from such rights to be regarded as income from immovable property. The effect is intended to be that the UK retain the taxing rights under relevant double tax treaties.

The measure will apply for accounting periods beginning on or after 13 July 2026.

3. Foreign Branch Exemption

Changes are to be made to make the current elective foreign branch exemption regime mandatory for all foreign branch profits of UK entities. These measures are intended to prevent companies from enjoying the benefit of losses from branches whilst arranging for profits to fall within the exemption.

At the time that this measure was announced it was stated to have immediate effect for oil and gas companies but the draft legislation sets out that the new regime will only apply for period beginning on or after 1 January 2027, subject to anti avoidance rules to tackle forestalling arrangements. There are also measures to prevent the shortening of accounting periods from delaying implementation.

The current opening negative amount rules are to be replaced with a new loss restriction rule which at first pass looks particularly complex.

Companies with overseas branches will need to carefully review the effect of these proposals and ensure that their impact is taken into account in preparing any open tax returns for periods prior to their introduction.