Following record high oil and gas prices, the UK Government introduced new legislation which applies a levy on oil and gas companies.
The aim of The Energy (Oil and Gas) Profits Levy Bill ('Bill') was in part to help tackle the cost of living crisis. It follows the statement by former UK Chancellor Rishi Sunak to the House of Commons on 26 May 2022 setting out the measures the government intended to take to tackle the cost of living crisis.
The government expects that the Bill will raise around £5 billion within the first year.
The levy is a new 25% surcharge on profits of companies operating in the oil and gas sector. Electricity generating companies are not included in the new levy.
The levy applies to profits arising on or after 26 May 2022 to companies within the ring fence corporation tax regime of 30%. These companies are also subject to the supplementary charge to corporation tax of 10%. With the addition of the levy the headline tax on profits will be 65%.
The UK government is not alone in introducing such measures. Earlier this year, the Italian government announced a one-off 25% levy on the extraordinary profits of energy firms.
The government intends to phase out the levy if the oil and gas prices return to historically normal levels. The legislation also includes a sunset clause, effective at the end of December 2025.
Given the recent announcements by Shell and BP amongst others of significant increases in profits as against the equivalent period in 2021 amidst the backdrop of rapidly escalating energy prices compounding the current cost of living crises it is foreseeable that the levy could be increased and/or extended in duration.