Autumn Statement - Business Tax Changes in Energy Sector
posted 17th November 2022
Upstream Oil and Gas Energy Profits Levy
As has heavily trailed in the media, the rate of Energy Profits Levy (EPL) has increased from 25% to 35%. First introduced back in May this year, the EPL is charged additionally on the 30% corporation tax rate and 10% supplementary charge taking the marginal tax rate to 65%. With the change in the Autumn statement this has now increased to 75% effective from 1st January 2023 with the term extending to the end of March 2028 and will also no longer be phased out ahead of the sunset date if commodity prices returned to more "normal" levels which was a previous commitment.
The commitment to retain the EPL through to March 2028 may allow some companies to plan investment activities with greater certainty around investment reliefs. However, other companies will consider the commitment to keep the EPL even if prices were to drop significantly before the sunset date a major risk in its own right particularly in the light of the wider fiscal uncertainty in the sector noting the Government also announced a consultation on the long-term tax treatment of oil and gas production in the UKCS to be implemented after March 2028.
The investment allowance is to change so that all qualifying expenditures (other than decarbonisation expenditure which is now confirmed at 80%) will reduce to 29% The Government's objective was to maintain the existing cash value of the investment allowance as shown below however, it is now possible that many companies with significant investment expenditure plans may now start to pay the EPL. As previously, finance and decommissioning costs are not EPL deductible.
Effective Tax Relief for Capital Expenditure
| Tax | Pre-Autumn Statement Tax Rate | Pre-Autumn Statement Allowance | Net Capex* Relief Pre-Autumn Statement | Post-Autumn Statement Tax Rate | Post-Autumn Statement Allowance | Net Capex* Relief Post-Autumn Statement |
|---|---|---|---|---|---|---|
| Corporation Tax (CT) | 30% | 100% First Year Allowance | 30% | 30% | 100% First Year Allowance | 30% |
| Supplementary Charge (SCT) | 10% | 100% First Year Allowance | 10% | 10% | 100% First Year Allowance | 10% |
| Investment Allowance (SCT) | 10% | 62.5% Uplift | 6.25% | 10% | 62.5% Uplift | 6.25% |
| Energy Profits Levy (EPL) | 25% | 100% First Year Allowance | 25% | 35% | 100% First Year Allowance | 35% |
| Energy Profits Levy (EPL) Uplift | 25% | 80% Investment Expenditure Uplift | 20% | 35% | 29% Investment Expenditure Uplift | 10.15% |
| 91.25% Effective Tax Relief | 91.40% Effective Tax Relief |
The table above shows the effective tax relief for capital expenditure and certain operating and leasing expenditure under the pre and post-Autumn Statement 2022 EPL.
*Certain decarbonisation expenditure such as "modifying existing installations to use power from offshore windfarms, installing bespoke wind turbines to power the installation or running electricity cables to the installation from shore" will keep the current 80% uplift which could result in an effective tax relief rate of 109.25% for these expenditures.
Electricity Generator Levy
The Government has now introduced an new Electricity Generator Levy (EGL) which will come into force also from 1st January 2023 which will apply to groups who generate electricity from renewable, nuclear or biomass sources but not from fossil fuels (oil, gas or coal), hydro or battery storage and is targeting the extraordinary returns being generated due to the electricity prices being strongly correlated to the price of gas.
The basis of extraordinary returns will be calculated by reference to an average output price of £75 per MWh through to 31st March 2028 but if prices drop below that level before that date no levy will be payable. The EGL will be without deduction for any capital or operating expenditure or corporation tax and has been set at 45% and will be payable on a groupwide basis for entities generating over 100 GWh of electricity per annum and is subject to an annual allowance of £10 million.
Further detail of the EGL is still to be finalised including how this would apply to joint ventures and Government has promised consultation with generating companies.
