June 23, 2022
UK Government launches short consultation on draft Energy (Oil and Gas) Profits Levy Bill
On 21 June 2022, the United Kingdom (UK) Government published draft legislation to bring in the new energy (oil and gas) profits levy (the levy). The consultation period is very short and comments on the draft Bill are requested by 28 June.
The levy applies to a company carrying on a ring fence trade and is charged at the rate of 25% on the levy profits in a qualifying accounting period. At this time, the levy has not been extended to electricity generators as had been rumored as being under consideration. The levy is charged as if it were an amount of corporation tax. It is time limited with qualifying accounting periods defined as being periods beginning on or after 26 May 2022 and ending on or before 31 December 2025. There are transitional provisions for straddling periods.
Provisions of the proposed legislation
Charge to tax
Clause 1 of the draft legislation provides the levy, setting out that the levy will apply to a company carrying on a ring fence trade and will be charged at 25% on levy profits arising in a qualifying accounting period. It is also confirmed that the levy will be charged as if it were an amount of corporation tax, including (but not limited to) application to matters such as returns of information, assessing and collecting of tax, rights of appeal, penalties, interest and insolvency.
The application of the levy has been time limited by defining a qualifying accounting period as being one beginning on or after 26 May 2022 and ending on or before 31 December 2025 (with straddling periods ensuring the levy applies from 26 May 2022 to 31 December 2025).
The levy profits or loss for a qualifying accounting period are those that would be determined as a company’s ring fence profits or loss, with certain adjustments:
Clause 2 of the legislation defines “investment expenditure” for the purposes of the additional relief. Investment expenditure is defined as expenditure that is capital expenditure, operating expenditure or leasing expenditure and which has been incurred for the purposes of oil-related activities, provided that it has not been incurred for disqualifying purposes and does not consist of financing or decommissioning costs. For these purposes capital expenditure is treated as incurred by reference to the rules in CAA 2001 and operating expenditure or leasing expenditure is treated as incurred on the date on which it is paid. It is also clarified that expenditure incurred either before 26 May 2022 or after 31 December 2025 is not to be treated as expenditure incurred in a qualifying accounting period.
The qualifying conditions for both “operating expenditure” and “leasing expenditure” are aligned with the equivalent definitions found under the Supplementary Charge investment allowance (so that only extremely specific types of operating expenditure or leasing expenditure qualify). The qualifying amounts identified for the purposes of the investment allowance under the levy would therefore be expected to broadly equal the qualifying amounts identified for the purposes of the investment allowance under the Supplementary Charge.
It is also confirmed that additional expenditure is only available for new assets with the legislation specifying that expenditure is not to be treated as investment expenditure in certain cases where an existing asset has been “recycled.” A just and reasonable apportionment is required if investment expenditure is incurred partly for the purposes of oil-related activities and partly for other purposes.
Anti-avoidance provisions are introduced under clause 5, whereby expenditure is not to be treated as investment expenditure where it arises directly or indirectly in connection with, or otherwise in consequence of, any avoidance arrangements. For these purposes “avoidance arrangements” means any arrangements the main purpose, or one of the main purposes, of which is the securing of a relevant levy advantage.
Clause 8 of the legislation defines what is meant by financing costs, and it is noted that this is modelled on the existing provision in section 331 of CTA 2010. Therefore, the “financing costs” calculated for the purposes of the levy would be expected to be equivalent to the “financing costs” calculated for Supplementary Charge purposes.
Clause 9 of the draft legislation defines decommissioning costs and provides that decommissioning costs means any expenditure which is decommissioning expenditure or site restoration expenditure, which qualifies for a capital allowance. It is therefore purposely widely drawn; however, for these purposes “decommissioning expenditure” and “site restoration expenditure” broadly follow the definitions used for decommissioning expenditure incurred as part of a ring fence trade.
Clause 12 of the draft legislation introduces a requirement for companies making a levy payment to provide information about that payment to Her Majesty’s Revenue & Customs (HMRC), so that receipts from the levy can be monitored. It is also noted that the penalty regime under Part 7 of Schedule 36 to FA 2008 would apply where the notification requirements are not followed.
For periods straddling either the commencement date of 26 May 2022 or cessation date of 31 December 2025 (i.e., a ‘straddling period’), it is confirmed that the installment payment regime would be applicable for the straddling period “as if it were an accounting period for the purposes of instalment payments.” Our interpretation of this is that for the straddling period beginning 26 May 2022 and ending 31 December 2022, there will be two installment payments, one six months and 13 days after 26 May (i.e., on 9 December 2022), and the other on 14 January 2023. This is not consistent with the information provided when the levy was first announced, as at that point it was instead suggested that the levy would be payable in full on 14 January 2023. More detail on this point is expected from HMRC.
Apportionment of profits
The legislation confirms the rules for apportioning profits or losses to separate accounting periods where a company has a straddling period. The rules require that the apportionment methodology should be on a “just and reasonable” basis, apart from capex, which is instead based on when incurred. The draft legislation specifically avoids making any reference to mandatory time apportionment, a concept which previously caused complications when dealing with historic changes relating to Supplementary Charge.
Levy loss relief regime
Schedule 1 of the legislation sets out the relief available for levy losses, providing a mechanism for the carryback, carryforward and group relief of qualifying levy losses. In line with expectations, losses can be carried back 12 months against qualifying levy profits and terminal loss relief is also available where a ring-fence trade ceases (providing an extended three-year carryback). Unrelieved qualifying losses can also be carried forward to subsequent “qualifying accounting periods.”
The schedule also makes provision for in period “levy group relief” for qualifying levy losses incurred in a qualifying accounting period between companies of the same group.
The limited loss carryback could potentially act to deny full relief for investment expenditure incurred by a company under the regime, for example where a company has a 2024 or 2025 levy loss that cannot be carried back to 2022 (any levy loss carried forward at the time the regime ceases is effectively lost).
Other points to note
Petroleum revenue tax (PRT) refunds
No provision has been made to exclude PRT refunds on decommissioning expenditure from being taxable within the levy. The expectation might have been that the treatment of PRT refunds would mirror the treatment of the underlying decommissioning expenditure, i.e., if decommissioning expenditure is not deductible within the levy then one might not expect PRT refunds (arising from said decommissioning expenditure) to be taxable. However, in the absence of a specific exclusion this does not seem to be the case.
Temporary nature of levy and “normal price levels”
No attempt is made within the legislation to introduce the concept of the levy ceasing where prices return to “normal price levels” (as suggested when the levy was first announced) or then defining what “normal price levels” would mean. Instead, the legislation just states that the levy does not apply after 31 December 2025.
Energy transition expenditure
As it is drafted, expenditure incurred in relation to “energy transition activities” will not qualify for the 80% additional allowance unless it can be shown to be for the purposes of oil-related activities.
RFES (ring fence expenditure supplement)
For completeness, it is noted that no provision is included for RFES uplift on levy losses, although this is perhaps unsurprising.
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