UK Budget: CCUS and tax relief measures may soften oil and gas energy profits levy blow

Jake Landman of Pinsent Masons was commenting after UK chancellor Rachel Reeves confirmed plans to increase the EPL rate and reduce the scope oil and gas companies have to reduce their liabilities under the EPL. Reeves also confirmed that operation of the levy will be extended to 2030, but she further announced the planned introduction of new measures aimed at encouraging oil and gas assets to be repurposed for CCUS.

The EPL applies to oil and gas producers. From 1 November 2024, the EPL rate will increase from 35% to 38%. The levy was set at 25% prior to 1 January 2023.

In her Budget, Reeves also confirmed that the EPL will now remain in place for longer, until 31 March 2030, when the levy will end. The government said it plans to consult in early 2025 “on how the taxation of oil and gas profits will respond to price shocks after the EPL ends”.

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Oil and gas producers have, to-date, been able to secure some relief from EPL under an investment allowance mechanism, but the abolition of that allowance was confirmed in the Budget, with the exception of decarbonisation allowance for decarbonisation expenditure. However, from 1 November 2024, a reduced 66% rate of decarbonisation allowance applies.

Landman said: “The removal of the investment allowance is a blow for oil and gas companies but the continuation of the decarbonisation allowance, albeit reduced, and retention of first year allowances relief for EPL, should ensure some investment continues.”

“After a series of extensions to the EPL, the sector continues to operate under a cloud of uncertainty. There is at least some reassurance from the fact that, once the EPL ceases to operate in 2030, or earlier under the Energy Security Investment Mechanism, the government is committing to provide a clear direction of travel through the consultation in early 2025, so the sector can adequately align themselves and plan,” he added.

Some positive news for UK oil and gas companies, Landman said, was confirmation in the Budget of the government’s plans to legislate in the Finance Bill 2024-25 to provide for tax relief for payments oil and gas companies make into decommissioning funds in relation to assets sold for use in CCUS – technology that enables greenhouse gases to be removed from the atmosphere.

Landman said industry would particularly welcome the plans, “because payments received for such transferred assets are to be expressly excluded from the EPL”.

“This proposal will remove a tax barrier that disincentivised oil and gas companies from repurposing their assets in this way,” Landman said.