May 26, 2022
UK announces new 25% energy profits levy
On 26 May 2022, the United Kingdom (UK) Chancellor, Rishi Sunak, delivered a statement to the House of Commons setting out the measures the Government will take to address the UK’s cost of living crisis.
The Chancellor announced a new 25% energy profits levy that will apply from 26 May 2022 and will be charged on the extraordinary profits that oil and gas companies are currently making. The tax will be temporary, and, once oil and gas prices return to historically normal levels, the tax will be phased out. The legislation will also include a sunset clause, which will remove the levy after 31 December 2025. The levy is expected to raise £5 billion this year.
Alongside the new levy, the Chancellor also announced a new 80% investment allowance for the purposes of the levy, similar to the UK’s super-deduction. He suggested the investment allowance would lead to tax relief of more than 91p for every £1 invested. However, it is not yet clear what kind of investment will benefit from the proposed incentive within the energy profits levy, but, in any event, it does not appear that investment outside of UK oil and gas activity will attract the 91.25% relief the Chancellor implied.
Electricity generating firms are not included in the new levy, and the Chancellor said that the Government is urgently reviewing the scale of the extraordinary profits they are making and the appropriate steps to take.
Key points of detail that have been released
The Government has published a factsheet on the levy and the investment allowance which makes the following points:
The energy profits levy helps pay for a new package of targeted government support to help with the rising cost of living. The UK Government has announced:
However, no further tax measures were announced, including a rumored cut in value added tax on energy bills. Instead, the Chancellor said that decisions in relation to promised “tax cuts and reform” will be made in the Autumn.
Today’s news is likely to delay and, in some cases, reduce medium term investment. The immediate effect on the supply chain will add further pressure to reduce capacity just as the UK reaches a point of inflection over the next five years where material opportunities will emerge in renewables. The consequence for the supply chain is that it will be less able to support these projects and more of the work may be sourced from overseas.
A key question to ask at this point is therefore to what extent the sudden increase in tax rate could lead to a level of uncertainty over the future tax regime that means investment previously destined for the UK will be curtailed and directed abroad. The Chancellor will be relying on investors acknowledging that the economy is operating in “exceptional times” and understanding that this is a short-term response that should not be seen as a predictor for the future. In taking a view on this, businesses will be looking to the strength of the sunset clause and a commitment and definite timetable for phasing out the tax.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom)
Ernst & Young LLP (United States), UK Tax Desk, New York
Ernst & Young LLP (United States), FSO Tax Desk, New York
Ernst & Young LLP (United States), Transaction Tax Desk, New York
Ernst & Young LLP (United States), UK Tax Desk, Chicago