Tax

On 9 June 2023, in a measure entitled the “Energy Security Investment Mechanism” (link), the Government announced that the energy profits levy (“EPL”) will be switched off if prices fall to historically normal levels. Based on 20-year averages, normal levels would be achieved where both average oil and gas prices fall to, or below, $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters. The rate of the EPL is 35%, resulting in a current headline rate of 75%. If it is switched off, the usual 40% rate (ring fence corporation tax and supplementary charge) to oil and gas profits will still apply.

The announcement seems to have been prompted by industry concerns that companies are cutting back on investment in the UK as a result of the EPL. Pre-empting criticism, the Government are keen to emphasise (even through the name of the proposal) that the measure is intended to protect UK domestic supply rather than having to import from abroad. It is not clear how the mechanism will be implemented. 

The Government note that it is not expected that prices will fall below the thresholds prior to the EPL’s planned end date in March 2028, in which case the current 75% headline rate would remain. Even if the mechanism were to apply, it could have the effect of huge swings in rates should prices start to fluctuate materially, leading to uncertainties for companies modelling cash flows. Finally, given recent Labour Party policy has been to increase taxation on the sector, a future Government may well reverse the mechanism.  

Update:

On 18 July 2023, HMRC announced that it would like to engage with stakeholders to discuss the application of the “Energy Security Investment Mechanism” (the mechanism to switch off the EPL when oil and gas profits rise).  This includes the approach to collecting data for the trigger point and the legislative approach to give effect to the mechanism.  The intention is that, following discussions with stakeholders, the Government will publish a technical note to set out details to help provide industry certainty.