CW Energy LLP

New Windfall Tax on the UK Oil & Gas sector

A new 25% tax on the UK upstream oil and gas industry is being introduced with effect from 26 May 2022, to be known as the Energy Profits Levy. The levy is intended to apply until 31 December 2025. It will be charged on the same profits that are already subject to ring fence corporation tax (RFCT) and supplementary charge, giving a combined rate of 65%. The RFCT profits are, however, adjusted by the disallowance of any loss relief, financing costs, and decommissioning costs. A new investment allowance at 80% of qualifying expenditure will be available to reduce profits subject to the levy.

The Chancellor announced on 26 May 2022 that a new “windfall tax” on the UK upstream oil & gas sector was being introduced. This is to be called the energy (oil and gas) profits levy or “the levy” but is referred to in this article as the Levy. A draft of the legislation was published on 22 June 2022 with a very short consultation period ending on 28 June 2022. The Bill was laid before Parliament for its first reading on 4 July 2022.

This note sets out the position as it is understood as of 4 July 2022 and should be read as being subject to any changes in the draft legislation that might arise as the Bill passes through Parliament.

Profits chargeable

 The Levy will be charged at a rate of 25% on profits falling within the ring fence regime (as set out in Part 8 CTA 2010) adjusted for certain specific matters and reduced by an additional expenditure amount broadly modelled on the existing supplementary charge (SC) investment allowances (Ch 6A to 9 of Part 8 CTA 2010).

This impost is in addition the ring fence corporation tax (RFCT) at 30% and SC at 10% levied on those same profits, giving an overall marginal rate of tax of 65%, although as the tax base for each of these taxes is somewhat different the overall effective rate of tax on profits will depend on the make-up of a company’s results for a particular period.

The Levy will apply to relevant profits accruing in the period from 26 May 2022 until 31 December 2025 or earlier if oil and gas prices revert back to a “historically more normal levels”. The draft legislation contains no provisions regarding this potentially earlier cut off, although when questioned in Parliament the Chancellor suggested average and normal Brent prices over the last 10 years were between $60-$70. This uncertainty over the period for which the Levy will apply makes planning very difficult, and industry has asked for further clarification on this aspect.

Where actual accounting periods straddle either 26 May 2022 or 31 December 2025 there are deemed to be accounting periods ending on 25 May or 31 December 2025, and profits or losses of the actual accounting period have to be apportioned between the two notional periods (clauses 15 to 17 to the Bill). Other than capital allowances which are deemed to arise in the notional period in which the expenditure is incurred (applying capital allowance principles as set out s5 CAA 2001), all other income and deductions have to be apportioned on a just and reasonable basis. This is in contrast to the position for the SC rate changes in 2011, where the default was time apportionment, with the possibility of a company electing to use an alternative just and reasonable basis if time apportionment worked unjustly or unreasonably in the company’s case. This will hopefully generate fewer problems than those which arose with the SC change HMRC and industry had a different view of how the law was to be applied and this ultimately led to the issue being pursued successfully by Total in the Court of Appeal (Total E&P North Sea UK Ltd and Another v HMRC [2020] EWCA Civ 1419). There are no provisions to deal with straddling periods if the Levy is withdrawn prior to 31 December 2025 (because oil and gas prices have returned to a “normal” level), but presumably they would be introduced, if and when, this eventuality arose.

The adjustments that have to be made to the RFCT profits or losses to arrive at the profits or losses for Levy purposes are that; any relief for RFCT losses carried forward, carried back, or claimed as group relief, any decommissioning costs, and any financing costs all have to be added back; but the profits are then reduced by an investment allowance, and by any petroleum revenue tax (PRT) repayments referable to any PRT losses attributable to decommissioning expenditure. The definitions of financing costs and decommissioning costs are broadly the same as is used for SC purposes (with some minor drafting differences) (see s330C and s331 CTA 2010).

Investment allowance

The Levy additional expenditure allowance is set at 80% of qualifying expenditure, such that 100 of spend will give rise to a total deduction against levy profits of 180 (Cl 2 of the Bill). Qualifying expenditure is capital expenditure and certain operating and lease expenditure which is incurred for oil related activities as defined in s274 CTA 2010, i.e. expenditure incurred for ring fence purposes and is not incurred for a “disqualifying purpose”. In all cases decommissioning and financing costs are excluded from the allowance.

Qualifying expenditure is broadly the type of expenditure on oil related activities that qualifies for investment allowances within the SC regime (see The Investment Allowance and Cluster Area Allowance (Investment Expenditure) Regulations 2017), but unlike the SC investment allowances, 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 before it can be set against Levy profits.  

Qualifying operating expenditure will be that which is incurred in relation to a facility or oil well and which enhances production rates, reserves, life of field, working life of a facility, or tariff income which can be earned by upstream infrastructure, but is not something representing routine repair and maintenance expenditure. The uplift is confined to facilities used in offshore oil and gas production. These rules should by now be reasonably familiar to upstream industry taxpayers given the experience with applying them within the SC regime.

Qualifying leasing expenditure also follows the definition used for the SC investment allowance. The past CT treatment of existing leases will impact the relief which is now available for Levy purposes and could give taxpayers with similar pre-tax profits very different Levy results.

Given the push by many upstream companies, both large and small, to invest in “alternative energy” projects, which is being actively encouraged, it is disappointing that investment allowance is not available in respect of such non-ring fence projects.

As noted above, certain expenditure is also specifically disqualified from the 80% uplift. Uplift is not available for expenditure on ‘second-hand’ assets (Cl 6 to the Bill). The rules here are very broadly drafted and deny the allowance on the acquisition of 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 Levy 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. As an example, expenditure on the acquisition of a vessel that had previously been used in connection with a UK field, even if many years previously, would not qualify for uplift whereas expenditure on the same type of vessel that had only previously been used in, say, the Norwegian sector would qualify.

There is also an anti-avoidance provision (Cl 5 to the Bill) which disqualifies any expenditure incurred for a “disqualifying purpose” from qualifying for the Levy additional allowance. A disqualifying purpose exists if the expenditure arises either directly or indirectly in connection with an arrangement, the main purpose, or one of the main purposes, of which is to obtain a levy advantage, i.e. a reduction, deferral or avoidance of the EPL.

Where qualifying Levy investment expenditure is incurred the marginal rate of relief can amount to 91.25p in the £ for a full taxpayer. This is made up with 30% RFCT relief; 10% SC relief; 6.25% SC investment allowance relief (albeit deferred until the relief is activated with income from the relevant field); 25% Levy relief; and 20% (25% x 80%) Levy investment relief.

Use of losses

While RFCT loss relief is denied, the rules include a bespoke Levy loss regime as set out in Schedule 1 to the Bill. Levy losses can be carried forward or carried back one year, or surrendered as “EPL” group relief against Levy profits of other group companies, as defined for normal group relief purposes. If the ring fence trade ceases, “EPL” terminal loss relief rules permit a three year extended carry back against profits within the Levy regime. These provisions are all subject to detailed rules including anti-avoidance provisions, but broadly follow similar rules for RFCT loss relief.

There are also matching provisions as for RFCT dealing with payments made for Levy group relief, and the so called MCINOCOT rules in Part 14 CTA 2010, and the transfer of trade rules in Part 22 CTA 2010 are applied to Levy losses.

The one year Levy loss carry back for ongoing trades seems overly restrictive given that Levy is expected to apply for only 3½ years and that new investment which the uplift is intended to encourage will inevitably take time to come to fruition. For example, full relief for investment from 2024 onwards (for December year end companies) may not be available where this generates losses.

In addition to the anti-avoidance rule for expenditure qualifying for the investment allowance referred to above, there is a further anti-avoidance rule for Levy losses in Sch 1 para of the Bill which is modelled on the 2017 loss TAAR, but is more widely drafted. The benefit of any Levy loss relief can be eliminated where the main or one of the main purposes of the arrangement which gave rise to the loss is to obtain a Levy advantage and it is reasonable to conclude, that the arrangements are intended to circumvent the intended limits of the relief or otherwise exploit shortcomings in the Act, but also where the arrangements include steps which are contrived, abnormal, or with no genuine commercial purpose.

Management and administration of the EPL

The rules provide that the Levy is to be charged as if it were an amount of corporation tax, with all enactments applying to corporation tax applying to the operation of the Levy, subject to any necessary modifications.

With respect to instalment payments they must be paid with reference to the deemed Levy accounting period in any straddling period as referred to above, as if it were a separate accounting period. When the Levy was announced on 26 May 2022 the explanatory notes set out that no instalments would be due until 14 January 2023. That has not however been provided for in the draft legislation and the normal instalment provisions will apply. It is understood that HMRC have realised that their systems could not cope with calculating interest payments on over or under repayments if the one-off 14 January 2023 date had been adopted.

The instalment payment regulations are being amended (Sch 2 para 3 of the Bill) is such a way that the provisions applicable to RFCT apply to the Levy instalments. As a consequence, December year end companies which are large or very large will have their first Levy instalment due on 9 December 2022 (six months and 13 days after the start of the deemed accounting period), and a final instalment in respect of the deemed period to 31 December 2022 on 14 January 2023 (14 days after the end of the accounting period). For June year end companies there will be a single instalment payment due for the whole of their liability for the 36-day deemed accounting period ending 30 June 2022 on 14 July 2022. It is however not yet clear whether the Bill will be enacted by that date or the consequences if it has not.

The Bill (Cl 12) includes a requirement to notify HMRC of the amount of any Levy being paid, on or before the date any such payments are made. This notification should be made by the company with the Levy liability or if a group payment arrangement is in place the group company responsible for paying the group’s tax liabilities.


There are a number of aspects of the rules that appear surprising.

Firstly, ring fence capital gains, i.e. capital gains on the disposal of licence interests which contain a determined field, and any assets sold in conjunction with such a disposal, are subject to the Levy. Capital gains by their nature capture all future profits from the field so for any field interest where the field is expected to continue producing beyond 31 December 2025, any profits (appropriately discounted) post 31 December 2025 will be effectively subject to the Levy where a chargeable gain arises. It is possible that reinvestment relief under s198A et seq TCGA 1992 might be available to exempt any gain from RFCT, and therefore the Levy, but if that or other planning options are not available this is likely to prove to be a block on any field licence interests changing hands

Although the Bill now contains a provision to exclude the levy of PRT repayments from losses attributable to decommissioning expenditure, which wasn’t included in the original draft Bill published for consultation, PRT repayments from other losses are still brought in to charge. This appears anomalous in the sense that no Levy relief was available for the PRT originally paid which is now being repaid, giving rise to an unwarranted windfall to the Government, when the repayment has nothing to do with the current high price situation. Taxpayers will probably also be looking closely on whether making PRT repayments subject to the Levy will give rise a claim under against the Government under decommissioning relief deeds (DRDs).

Further, RDEC credits on ring fence expenditure are within the scope of the Levy, which would appear contrary to the policy of incentivising R&D investment.

Mitigation and Planning opportunities

Companies will want to look carefully at the cut off rules to ensure that profits that do not need to be brought in can be excluded.

Factors such as the limited time frame for which the Levy is to apply and the material uplift which is available on certain expenditures will also mean that companies will want to review existing and potential project timings carefully. Companies which are expected to pay significant amounts of the Levy may also want to look at investment opportunities which may produce tax relief up to 91%, particularly if those opportunities might otherwise be pursued by companies with the expectation of little or no Levy liability. However, the fact that partners in a particular joint venture may be in materially different Levy positions could lead to misalignment and commercial tensions within that joint venture. Any planning ideas will of course have to be looked at carefully in light of the Levy losses anti-avoidance provision referred to above.


The introduction of this additional levy against UK upstream oil and gas profits adds an extra layer of complexity to an already extremely complex tax regime, and will have an adverse effect on industry confidence, thereby potentially having the opposite effect of the Levy investment allowance which is intended to boost investment in the sector. Although there may be an advancement of projects in the short term, it is unclear whether any of these will be incremental. It will also provide no encouragement to the sector to invest in alternative energy projects giving the Levy will reduce the profits available to invest and such expenditure cannot qualify for the Levy investment allowance. Any reduction in investment will also have an adverse impact on the support sector that haven’t had the same benefit of high commodity prices.

This article was originally published in The Tax Journal on 15 July 2022.

CW Energy

July 2022