Industry needs timing clarity on energy profits levy allowances

The temporary levy was announced by chancellor of the exchequer Rishi Sunak as part of a package to tackle the rising cost of living. It increases the headline rate of tax on the relevant profits from 40% to 65%, but according to a technical note is subject to a “generous allowance which will reward those companies who invest in oil and gas production”.

The levy will be charged in addition to ring-fence corporation tax (RFCT) and supplementary charge and will apply to broadly the same ring fence profits.

However, finance charges and decommissioning costs are not deductible and levy profits can be reduced by an 80% allowance on qualifying investment expenditure.

Loss relief will be available within the levy by way of a loss carry back of 12 months against previous levy profits, or three years for terminal losses; a loss carry forward against future levy profits; and group relief in year to another company with levy profits.

However, there will be no crossover of losses between the levy losses and other ring fence taxes, so RFCT losses and other historic losses cannot be used to reduce profits subject to the levy and levy losses cannot reduce RFCT profits.

A factsheet published alongside the technical note gives examples of how the investment allowance could work. Existing allowances would provide a company with 46.25% relief for expenditure, made up of a 100% enhanced first year capital allowance for assets used in ring fence trades, which is allowed against both the 40% RFCT and from the 10% supplementary charge, and the existing 62.5% investment allowance against the supplementary charge.

A company incurring qualifying expenditure will now also be able to claim the new 80% investment allowance and the 100% enhanced first year capital allowances against the 25% energy profits levy, giving a further 45% relief on the expenditure. Overall, this will relieve 91.25% of the expenditure from tax.

The new allowance will be available to companies at the point of investment and does not need to wait until income is received from the field – as is the case for the investment allowance against the supplementary charge.

Tax expert Sam Wardleworth of Pinsent Masons said: “The new allowance is a welcome relief from the new levy, but it does leave the industry with another, slightly different type of allowance to grapple with the detail on.”

“Companies with ring fence trades already have to deal with the different rules that apply to the enhanced first year allowances for plant and machinery and the investment allowance for the supplementary charge. One of the matters that can cause confusion is the point at which a company can claim an allowance relative to the obligation to pay for the investment. The rules for each of the existing allowances are different. We hope that the position for the new allowance is made clear from the outset,” Wardleworth said.

The government said the levy would be introduced through a stand-alone bill, which should provide more details of how the levy will work and the investment allowance applied, including what constitutes qualifying investment expenditure and the timing of allowances.

The intention is that the levy, which the government suggested could raise as much as £5 billion, will be phased out when oil and gas prices reduce to "more normal levels", and will expire after 31 December 2025.