Government publishes Energy Profits Levy legislation

HMRC has published draft legislation for the new Energy Profits Levy, along with a detailed explanatory note (21 June 2022). Consultation on the draft Energy (Oil and Gas) Profits Levy Bill will run until 28 June 2022.

Announced just last month (see our article here setting out broad details and implications of the tax), the Energy Profits Levy will have effect for profits arising on or after 26 May 2022. The UK government intends to phase out the levy if oil and gas prices return to ‘historically more normal levels’, but the Bill also includes a sunset clause which means that the levy will by default expire on 31 December 2025.

In broad summary, the draft Bill is set out as follows:

• Clause 1: introduces the charge to the levy. In essence, the levy applies to a company carrying on a ring fence trade and is charged at a rate of 25% on the levy profits in a qualifying accounting period (beginning on or after 26 May 2022 and ending on or before 31 December 2025), and is charged as if it were an amount of corporation tax.

The levy profits or loss for a qualifying accounting period are those that would be determined as a company’s ring fence profits or loss, on the basis that adjustments for certain assumptions (set out in subsection 5) are to be made, including leaving out of account financing and decommissioning costs, as well as loss relief, group relief and group relief for carried forward loss (under Part 4, 5 or 5A of CTA 2010).

• Clauses 2-7: set out the new 80% investment allowance which accompanies the levy. The allowance applies if, in a qualifying accounting period, a company has incurred 'investment expenditure'. This is defined as expenditure that is capital expenditure, operating expenditure (clause 3) or leasing expenditure (clause 4) which has been incurred for the purposes of 'oil-related activities' (broadly covering expenditure incurred in relation to increased oil extraction), provided that it has not been incurred for disqualifying purposes (connected with avoidance arrangements, clause 5) and does not consist of financing or decommissioning costs.

• Clauses 8-9: define financing costs and decommissioning costs, both left out of account in calculating profits or losses for the purposes of the levy.

• Clause 10: introduces Schedule 1 which provides for the mechanism to carry back or carry forward qualifying levy losses and includes the time limits for making loss claims. Part 2 of the Schedule covers group relief for qualifying losses.

• Clauses 11 to 13: apply much of the corporation tax administrative framework to the levy and include a requirement for companies making payments of the levy to provide information about those payments to HMRC, so that receipts from the levy can be monitored (clause 12). All enactments which apply generally to corporation tax will apply to the levy (with such modifications as may be necessary), including those enactments relating to returns of information, assessing and collecting of tax, rights of appeal, and penalties and interest.

• Clause 14: introduces Schedule 2 which makes necessary and consequential amendments to existing legislation to ensure the correct interaction of those provisions with the levy.

• Clauses 15-17: set out transitional provisions for accounting periods which straddle the start and end dates of the levy.

The Bill will come into force on Royal Assent, which is expected to be some time before the Parliamentary summer recess begins on 21 July 2022.

Draft legislation and draft explanatory note are available here.