Following a global trend and as widely predicted, the government has announced further ‘windfall’ taxes on the energy sector by increasing the rate of energy (oil and gas) profits levy (EPL) and introducing a new electricity generator levy (EGL).
EPL
Less than eight months after EPL being introduced, the rate will increase from 25% to 35% from 1 January 2023. This brings the headline rate of tax on UK upstream oil and gas companies to 75%.
The additional investment allowance for qualifying expenditure has been changed from 80% to 29%, but this apparent reduction is intended to preserve the cash value of relief given the higher rate of EPL. Previously companies could claim £91.25 in tax relief for every £100 invested; that will become £91.40 (as explained in the government's Energy taxes factsheet). This, of course, assumes that full relief can be utilised which will depend on the profile of the relevant company.
However, the 80% investment allowance rate will continue for ‘decarbonisation expenditure’, potentially resulting in effective tax relief of 109.25% for such expenditure. The scope of this is unclear: the examples cited are modifying existing installations to use power from offshore windfarms and installing wind turbines to power electricity cables. Unlike the other EPL measures, which will be included in the Autumn Finance Bill, legislation for this relief will not be included until the Spring Finance Bill 2023.
The end date for EPL has been extended from 31 December 2025 to 31 March 2028. Back in May, the government indicated that it may phase out EPL early if prices returned to more normal levels; however, the government has now said it will no longer consider a phase out ahead of the new end date.
The government plans to consult with stakeholders over the coming months to ensure that the North Sea regime after the EPL delivers predictability and certainty. Stakeholders may well be sceptical though; both because of changes to the regime over the last two decades and the fact that there will be a general election before EPL is scheduled to end.
EGL
A new 45% electricity generator levy will be levied on certain low-carbon generators from 1 January 2023. The levy will apply in addition to corporation tax (and is not deductible from corporation tax), so from 2023 there will be a 70% headline rate on relevant revenues.
Some information on the design of, and rationale behind, the EGL is set out in a technical note published by the government, although we will have to wait for draft legislation expected in mid-December for much of the detail.
The EGL will apply to companies generating electricity from nuclear, renewable and biomass sources. At first sight this may seem surprising, but the rationale is that generators of this nature currently benefit from increased wholesale electricity prices, driven by increases in the wholesale gas price because of the way in which the markets operate, but they do not actually incur a corresponding increase in their costs of generation. The EGL will not apply to coal, oil or gas fuelled power generation; or hydroelectricity pumped or battery storage.
As the EGL applies to revenues, it appears to operate more like a royalty than a tax on profits. No specific reliefs are mentioned (unlike, for example, the investment allowance which applies to EPL).
EGL applies to generator groups that produce more than 100GWh on an annual basis and there is a £10m allowance per group. It will be imposed on ‘in scope’ receipts above a benchmark price of £75 per MWh. Energy sold under the government’s low-carbon ‘contracts for difference’ scheme will be excluded.
Like EPL, the EGL will be a temporary tax and will be legislated to end on 31 March 2028.
Home >Articles > Autumn Statement 2022: windfall taxes
Autumn Statement 2022: windfall taxes
Following a global trend and as widely predicted, the government has announced further ‘windfall’ taxes on the energy sector by increasing the rate of energy (oil and gas) profits levy (EPL) and introducing a new electricity generator levy (EGL).
EPL
Less than eight months after EPL being introduced, the rate will increase from 25% to 35% from 1 January 2023. This brings the headline rate of tax on UK upstream oil and gas companies to 75%.
The additional investment allowance for qualifying expenditure has been changed from 80% to 29%, but this apparent reduction is intended to preserve the cash value of relief given the higher rate of EPL. Previously companies could claim £91.25 in tax relief for every £100 invested; that will become £91.40 (as explained in the government's Energy taxes factsheet). This, of course, assumes that full relief can be utilised which will depend on the profile of the relevant company.
However, the 80% investment allowance rate will continue for ‘decarbonisation expenditure’, potentially resulting in effective tax relief of 109.25% for such expenditure. The scope of this is unclear: the examples cited are modifying existing installations to use power from offshore windfarms and installing wind turbines to power electricity cables. Unlike the other EPL measures, which will be included in the Autumn Finance Bill, legislation for this relief will not be included until the Spring Finance Bill 2023.
The end date for EPL has been extended from 31 December 2025 to 31 March 2028. Back in May, the government indicated that it may phase out EPL early if prices returned to more normal levels; however, the government has now said it will no longer consider a phase out ahead of the new end date.
The government plans to consult with stakeholders over the coming months to ensure that the North Sea regime after the EPL delivers predictability and certainty. Stakeholders may well be sceptical though; both because of changes to the regime over the last two decades and the fact that there will be a general election before EPL is scheduled to end.
EGL
A new 45% electricity generator levy will be levied on certain low-carbon generators from 1 January 2023. The levy will apply in addition to corporation tax (and is not deductible from corporation tax), so from 2023 there will be a 70% headline rate on relevant revenues.
Some information on the design of, and rationale behind, the EGL is set out in a technical note published by the government, although we will have to wait for draft legislation expected in mid-December for much of the detail.
The EGL will apply to companies generating electricity from nuclear, renewable and biomass sources. At first sight this may seem surprising, but the rationale is that generators of this nature currently benefit from increased wholesale electricity prices, driven by increases in the wholesale gas price because of the way in which the markets operate, but they do not actually incur a corresponding increase in their costs of generation. The EGL will not apply to coal, oil or gas fuelled power generation; or hydroelectricity pumped or battery storage.
As the EGL applies to revenues, it appears to operate more like a royalty than a tax on profits. No specific reliefs are mentioned (unlike, for example, the investment allowance which applies to EPL).
EGL applies to generator groups that produce more than 100GWh on an annual basis and there is a £10m allowance per group. It will be imposed on ‘in scope’ receipts above a benchmark price of £75 per MWh. Energy sold under the government’s low-carbon ‘contracts for difference’ scheme will be excluded.
Like EPL, the EGL will be a temporary tax and will be legislated to end on 31 March 2028.
