UK Chancellor of Exchequer, Jeremy Hunt, delivered his first Autumn Statement today. The principal measures are set out in our full briefing which can be found here but the energy sector will be particularly affected.
Extension of the Energy Profits Levy for oil and gas companies
The Energy Profits Levy currently applies at a rate of 25% to the ringfence profits of oil and gas companies in respect of corporation tax periods beginning on or after 26 May 2002 and ending on or before 31 December 2025.
Continued significant profits in the energy sector, coupled with the cost-of-living crisis, have led to calls for an extension of this windfall tax. It has been announced today that from 1 January 2023 the rate of the levy will increase to 35% and the duration of the levy will be extended to 31 March 2028. This will bring the headline tax rate for the sector to 75%, which the Government notes is comparable to other North Sea tax regimes, including Norway.
The current levy provides an 80% investment allowance, applicable to investment expenditure (capital expenditure and some operating and leasing expenditure), available for immediate use to reduce profits subject to the levy. The investment allowance will be reduced to 29% for all investment expenditure, other than decarbonisation expenditure (defined as investment in carbon emission reducing technology, such as installing bespoke wind turbines to power the production installation) which will continue to qualify for the current 80% investment allowance rate. Due to the higher rate of the levy, the Government notes that a reduction in the allowance rate will nevertheless broadly maintain the existing cash value of the allowance, with the aim of continuing to encourage companies to reinvest their profits in the UK.
Electricity Generator Levy
As a result of the structure of the electricity market which ties the price of electricity to the (currently unprecedentedly high) wholesale gas price, many electricity generators are expected to be making significant profits.
The Government has therefore announced the introduction of the Electricity Generator Levy, a temporary 45% tax that will be levied on “extraordinary returns” from low-carbon UK electricity generation, such as from nuclear, renewable and biomass sources (excluding electricity generated under a Contract for Difference with the Low Carbon Contracts Company Ltd).
For the purposes of the tax, extraordinary returns will be defined as the aggregate revenue that generators make in a period from in-scope generation in excess of a floor, based on the UK electricity generated from in-scope generation multiplied by an average output price of £75/MWh. The tax will apply to such returns arising from 1 January 2023 and will be limited to generators whose in-scope generation output exceeds 100GWh across a period, and will only then apply to extraordinary returns exceeding £10 million.
The levy will replace the Cost Plus Revenue Limit, announced by the Truss Government in October 2022.
The Limit would have introduced a cap on the revenues of non-carbon electricity generators from January 2023 and attracted much criticism from the sector.
Unlike the Energy Profits Levy, the levy does not feature an enhanced allowance for investment capable of offsetting/reducing the cash tax cost of the new levy. The Government notes that electricity generators are still “able to write off their investments against corporation tax by deducting their investment spending from their profit” in the usual manner.