The Chancellor delivered Spring Budget 2023 today. There were two announcements on the specific rules that apply to UK upstream oil and gas companies.
Decarbonisation allowance
The increase in the rate of Energy Profits Levy (‘EPL’) to 35% announced in the Autumn Statement 2022 was accompanied by a new decarbonisation allowance. This allowance would be more generous than the allowance applied to other investment expenditure. Where expenditure qualifies an additional 80% of that expenditure can be deducted from profits that are subject to EPL, as opposed to the 29% rate (from 1 January 2023) for other investment expenditure. Consultation has been ongoing over the past few months seeking to clarify what sort of expenditure should qualify.
A policy paper was published alongside the Budget documents setting out that legislation will be introduced so that decarbonisation allowance should be available in respect of:
“…decarbonisation expenditure which is broadly capital expenditure on assets relating to:
- Powering oil and gas production facilities from non- fossil fuel sources, and
- Reduction or elimination of flaring and venting of greenhouse gases.”
We expect that the actual legislation will be included in the Spring Finance Bill 2023 which is due to be published on 23 March 2023 and the measure will be effective from 1 January 2023.
HMRC has shared draft legislation with Industry for comment and we will be reviewing this over the next few days.
Decommissioning funds and Carbon Capture, Usage and Storage (‘CCUS’)
The policy and support framework for how companies will invest in CCUS projects has been developing. As part of that framework there is an expectation that decommissioning of infrastructure will be funded by contributions to a funded decommissioning programme. During the consultation it was noted that the tax treatment of contributions should be clarified.
At Spring Budget 2023 it was announced that legislation will be introduced in a future Finance Bill (i.e. not the Spring Finance Bill 2023) that will establish “the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of oil and gas assets for use in CCUS projects”.
There was no further detail included so it is not clear what tax treatment is being proposed. It is hoped that where a contribution is made by an oil and gas company in respect of its oil field infrastructure a deduction against ring fence profits will be available as the funds are alienated.
Minimum foreign tax – Pillar 2
In addition to these oil and gas measures, it was confirmed that UK legislation to introduce Pillar 2 of the OECD Inclusive Framework will be included in the Spring Finance Bill 2023 and will have effect for groups with accounting periods beginning on or after 31 December 2023.
A more comprehensive note on those rules will be included in a later Newsletter.
Comment:
Many will be disappointed that there were no broader statements from the Chancellor on changes to EPL. As oil and gas prices lower, many had hoped (and some had expected) that we would hear some acknowledgement from the Chancellor that there is a need to reduce or remove of EPL when oil and gas prices return to more normal levels. It may be that companies will need to wait for the wider consultation on the tax regime that was announced at Autumn Statement 2022 for that comfort.
The detailed legislative wording for the decarbonisation allowance will need to be carefully reviewed, however, the policy paper suggests that the allowance will be available for low carbon new assets as well as spend on retrofitting old assets.
CW Energy LLP
March 2023