Energy (Oil and Gas) Profits Levy Bill 2022-23

What taxes are paid on North Sea oil and gas?

Companies operating in the North Sea pay three separate profit-related taxes on oil and gas production: ring fence corporation tax, supplementary charge, and petroleum revenue tax (PRT). Total receipts from these taxes were £3.1 billion in 2021/22.

What did the Government announce in May 2022 about a windfall tax?

Following speculation that the Government would introduce a one-off ‘windfall tax’ in response to increased world oil and gas prices and the boost in profits from North Sea oil and gas production, on 26 May 2022 the then Chancellor Rishi Sunak announced measures to support households. These are to be funded in part by a new tax on the profits from North Sea oil and gas production: the Energy Profits Levy.

How will the Levy work?

Details of the Energy Profits Levy were set out in a factsheet published by HM Treasury.

Currently, the oil and gas sector pay a 40% headline rate tax on profits from oil and gas production in the UK and the UK Continental Shelf (UKCS). This consists of 30% ring fence corporation tax and 10% supplementary charge. At present the rate of petroleum revenue tax (PRT) is zero.

The Energy Profits Levy is an additional 25% tax on UK oil and gas profits on top of the existing 40% headline rate of tax, taking the combined rate of tax on profits to 65%.

The Levy takes effect from 26 May 2022. HM Treasury estimates that it will raise around £5 billion in its first 12 months

Companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy. The Government’s purpose in restricting relief this way is to “to appropriately tax the extraordinary profits” that the sector is making at present. An Investment Allowance will apply, set at 80%, available to companies at the point of investment.

The Treasury also published a technical note that provided a few more details on how the Energy Profits Levy would work in practice. This confirms that the Energy Profits Levy is “temporary” and “will be phased out when oil and gas prices return to historically more normal levels.” The legislation to establish the new charge will include a clause to remove the tax after 31 December 2025.

How will the Levy be introduced?

The Levy is to be legislated for via a standalone Bill. On 21 June HM Revenue & Customs published a draft of this legislation, and a draft version of its explanatory notes, seeking technical feedback before the Energy (Oil and Gas) Profits Levy Bill is introduced. The consultation closed on 28 June.

The Energy (Oil and Gas) Profits Levy Bill [Bill 135 of 2022-23] was introduced on 5 July 2022. The Bill, with its explanatory notes, is published on the Bill’s page on Parliament.uk, which also provides details of its parliamentary progress.

HM Revenue & Customs has published a tax information and impact note on the Bill.

As noted, the Levy has effect for profits arising on or after 26 May 2022.

Following an announcement by the Leader of the House on 30 June that the Bill would be ‘fast tracked’, the Bill completed all of its stages in the House of Commons on Monday 11 July. The Energy (Oil and Gas) Profits Levy Act 2022 received Royal Assent on 14 July 2022.

Further reading

Commons Library briefing Taxation of North Sea oil and gas explains how profits from North Sea oil and gas production are taxed, and how the fiscal regime that applies to North Sea oil and gas production has been reformed in recent years, including the Government’s announcement of the Energy Profits Levy.