The EPL was introduced in May 2022 to tax the extraordinary profits of oil and gas companies operating in the UK and on the UK Continental Shelf. The levy is currently set at a rate of 35%, bringing the headline rate of tax on upstream oil and gas activities to 75%. It offers two investment allowances: a 29% investment allowance and an 80% decarbonisation investment allowance. Capital allowances, including 100% first year allowances, are also taken into account in calculating EPL profits. The levy was due to expire on 31 March 2029 but will end sooner if oil and gas prices fall to thresholds set out in the Energy Security Investment Mechanism (ESIM).

However, in late July 2024 the new Labour government announced that the rate of the EPL would increase to 38% from 1 November 2024, bringing the headline rate of tax on upstream oil and gas activities to 78%. Furthermore, the period that the levy applies is to be extended to 31 March 2030, which is the end of the financial year in which the current Parliament is due to finish.  

The ESIM will remain in place, however, in order ‘to provide operators and their investors with confidence the levy will no longer apply if prices fall consistently to, or below, historically normal levels for a sustained period’, said the government.

The government also unveiled plans to ‘remove unjustifiably generous investment allowances’ from the EPL, including by abolishing the levy’s main 29% investment allowance for qualifying expenditure incurred on or after 1 November 2024. As part of this, the extent to which capital allowance claims (including first year allowances) can be taken into account in calculating levy profits will be reduced.

However, there are no plans to change the availability of capital allowances in the permanent regime, and the decarbonisation investment allowance will be retained.

In response, David Whitehouse, CEO, Offshore Energies UK (OEUK) expressed alarm, stating: ‘This is not partnership working between government and industry. These announcements have been made without meaningful engagement with this sector… [and] will only serve to rock confidence further’. He added that the changes would also ‘jeopardise jobs in communities across the UK… something the Prime Minister committed in his manifesto not to do’.

Supporting this view, OEUK has now released data modelling the impact of the government’s proposal on the UK economy, which suggests that while the expected tax take from UK oil and gas producers would increase in the very short term, the proposed fiscal policy would ultimately generate a loss in economic value of around £13bn compared to the economic contribution generated under the current windfall tax regime. The loss comes from an expected reduction in investment by oil and gas producers into the UK.

‘Continued uncertainty around the timeframe of the sunset clause, and the treatment of capital allowances, have further undermined the confidence of companies to invest in UK oil and gas production,’ says the OEUK.

The trade body argues that its data suggests that the proposals would lead to:

• A reduction in viable capital investment on the UKCS from £14.1bn to £2.3bn in the period 2025 to 2029.
• A reduction in the total economic value of the sector of £13bn in the period 2025 to 2029, which would directly impact the UK supply chain companies and risk losing capability and assets to other regions.
• Approximately 35,000 jobs put at risk over the period due to projects not going ahead.
• Some 63% of additional production that could be sanctioned under the current regime would be uneconomic, making the UK more reliant on other countries to meet the nation’s energy demand at a cost to the UK economy and net zero.

The OEUK also notes that ‘the proposed regime cannot be likened to Norway which allows companies a maximum £78 of relief for £100 expenditure’, claiming that under this proposal total relief would be £46.25.

The assessment concludes that ‘most potential investment in the sector will be curtailed if all capital allowances are removed, resulting in a rapid cessation of investment and eventual loss of critical infrastructure’.

Commenting on the newly-published data, OEUK’s Whitehouse says: ‘This is a government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy. This paper shows that proposals to go further will trigger an accelerated decline of domestic production, and a corresponding reduction in taxes paid, jobs supported and wider economic value generated.’

He continues: ‘For more than two years UK oil and gas operators have paid three times the rate of corporation tax of any other sector in the economy. Time is running out to mitigate damage that has already been done and to avoid further escalation. The Prime Minister promised to manage the North Sea in a manner that does not jeopardise jobs. We now need an honest conversation on how we can do this and need government to work with the sector at pace.’