- The Energy Profit Levy (EPL), announced in 2022, currently increases the marginal rate of tax on North Sea oil and gas production to 75%.
- At Spring Budget 2024, the previous government announced that the EPL would remain in place until 31 March 2029 and would no longer come to an end on 31 March 2028 as previously announced; however, this extension was not included in the Spring Finance Bill 2024.
- The previous government also confirmed the early termination of EPL before its sunset date (now 31 March 2029, previously 31 March 2028) if oil and gas prices were to return to “historically more normal levels”. This was legislated within the Finance (No.2) Act 2024 through the previously announced ‘Energy Security Investment Mechanism’.
- Under the ESIM, the tax rate applicable to oil and gas will reduce back to 40% (from 75% currently) if both the average oil and gas prices fall to, or below, $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters. These threshold prices will be adjusted annually based on the Consumer Prices Index (CPI).
- The ESIM is intended to give the oil and gas sector certainty to raise capital and invest in new and existing projects given the current high tax environment applicable to the UK upstream oil and gas sector and fiscal uncertainty which could erode investor confidence and result in diversion of investment from the UK Continental Shelf to other countries.
- On 29 July 2024, the new chancellor Rachel Reeves announced that the rate of the EPL will increase to 38% from 1 November 2024, bringing the headline rate of tax on upstream oil and gas activities to 78%.
- The levy will be extended from 31 March 2029 to 31 March 2030 and the extent to which capital allowances can be taken into account when calculating the EPL will be reduced though details will be announced at the Autumn Budget on 30 October 2024. The decarbonisation investment allowance will remain (albeit the rate may be reduced) together with the ESIM. The government recognised the importance of providing the oil and gas industry with long-term certainty on taxation after a period of change, and so the chancellor announced on the same day that it will begin work with the industry and others to develop and implement a successor regime for responding to price shocks after the EPL ceases.
- Timing: following the chancellor’s announcements on 29 July 2024, the government will be engaging with stakeholders before setting the new tax policy at the Autumn Budget on 30 October 2024. All changes are due to be legislated for in the next Finance Bill.
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