On 26 May 2022 the Chancellor of the Exchequer announced a new levy (the “Energy Profits Levy” or “Levy”) on the profits of oil and gas companies operating in the U.K. and the U.K. continental shelf. The Levy will be charged at 25%, increasing the headline rate of tax on those profits from 40% (consisting of Ring Fence Corporation Tax at 30% and Supplementary Charge at 10%) to 65%. This contrasts with the general corporation tax rate in the U.K. of 19% (set to increase to 25% from next year). Although draft legislation has not yet been published, the Energy Profits Levy applies immediately to profits of such companies arising on or after 26 May 2022.

The Levy will apply to a company’s ring fence profits, computed in a similar manner (but with some adjustments) to the existing taxes, Ring Fence Corporation Tax and Supplementary Charge. A key adjustment is the investment incentive, which is an allowance generated on investment expenditure (at 80% of such expenditure), which can be used immediately to reduce profits subject to the Energy Profits Levy. It is not clear if it will apply to tax capital gains; if so, this could result in a reluctance to pursue asset sales for the duration of the period when it is expected to be in force.

The announcement notes that the Levy is temporary, and that the legislation will include a “sunset” clause, removing the tax after 31 December 2025. The Levy was predictable following widespread pressure on the Government to introduce a windfall tax on energy companies and has been presented politically as funding grants to households in the U.K. struggling with the cost of living crisis. However, it will be unwelcome news for oil and gas companies operating in the U.K., who have pleaded for stability in the industry’s fiscal regime following a difficult decade, and may choose to invest in other jurisdictions with a more consistent approach.