There has been much coverage on the correlation between the current fiscal and political environment and the rapid decline in oil and gas investment, production, jobs and tax take. Many have identified the Energy Profits Levy (EPL) as a driver or significant contributor in this decline.

So, what is unusual about EPL, why might it be deterring investment in a way that Norway’s 78% tax rate (for example) does not, and what could the Chancellor’s next step be?

What is the UK oil and gas tax regime?

Exploration and production (E&P) companies are subject to modified corporation tax rules on their oil-related activities. The rules ring-fence those activities.

Within this framework there are now three calculations to assess the corporation tax charge, being the ring-fence corporation tax (RFCT) calculation at 30%; the supplementary charge (SCT) calculation at 10%; and the EPL calculation at 38%. Each has a slightly different set of tax rules and the profits subject to each charge may be vastly different.

EPL is unique as it applies for a designated period and the legislation further ring-fences the profits subject to EPL, preventing certain amounts (including decommissioning costs and pre-EPL losses) from eroding the EPL profit. So, while a combined tax rate of 78% can be calculated by adding together headline rates of RFCT, SCT and EPL, the effective tax rate suffered could be very different.

When will EPL expire?

The current policy is that EPL will run until 31 March 2030 unless the Energy Security Investment Mechanism (ESIM) is triggered. The ESIM was announced in 2023 to give the oil and gas sector certainty to raise capital and invest in new and existing projects. ESIM will switch off the EPL if both oil and gas prices fall below a 20-year average for a sustained period of 6 months. While this gives a mechanism to turn off EPL before the legislation expires, there has been much criticism that the trigger has been constructed so that it is unlikely to be met even in a low oil price environment, like we have seen recently.

The energy sector is now looking for a legislative change, and it is hard to think of a time when the UK oil and gas sector has been so visibly holding its breath ahead of the budget.

What about Norway?

Norway has managed to sustain investment with a 78% combined rate of tax. So, why is the UK tax regime considered such a deterrent for investment?

Mitigating the high tax rate, Norway provides a 71.8% tax repayment for exploration and development costs including decommissioning. The costs can be deducted in the year of investment and are refunded in the subsequent year. This means new entrants receive 71.8% of their exploration and development costs back irrespective of whether the exploration translates into a producing field. This significantly reduces the investment risk and financing costs of such explorative steps. Full relief at 78% can still be achieved if there are sufficient profits against which the costs can be offset.

While the Norwegian tax rate is high, the tax relief is also high, simple to understand and most of the tax relief/repayment is given close to the investment. This contrasts with the UK regime, where the timing and quantum of any tax relief is complex, may be capped and is much harder to predict.

What could the Chancellor do now?

The government consulted in 2025 on a proposed permanent mechanism which would replace EPL. The consultation set out two potential models, one profit-based and one revenue-based, that could target windfall earnings when there were unusually high price shocks. We would expect further information on this in the budget. Beyond this, the Chancellor could:

• Be bold: There has been plenty of data signalling that the time is now to be bold, with Offshore Energies UK warning that any delay in addressing investment challenges could do long-term damage to the UK energy industry, energy security and energy transition. The Chancellor may be considering a full repeal of EPL in 2026 or a phased reduction through to 2030, but either way one would presume that she would want to deliver something that stimulates investment and closes the EPL debate.
• Go small: The rumours of the Chancellor’s willingness to consider changes to EPL are recent, so will she have all the information to commit to an imminent and meaningful change in the EPL rate or term? She may instead tweak the rate or the expected end date. While this would be welcomed, she would need to consider if it would drive any meaningful increase in investment.
• Do something unexpected: In 2024 the Government unexpectedly announced that it would reduce the extent to which capital allowances could be considered in calculating profits subject to EPL. This was not enacted, but it is possible the Government would revisit changing the full expensing rules as a quid pro quo for measures to bring down the overall tax rate.  Again, while this is possible and would act to retain some of the near-term tax revenues, we consider it unlikely. Any change in EPL would be intended to stimulate investment and this provision would appear to work directly against that. The impact would also be difficult to model and likely add further complexity.

We have been forewarned this will be a tough budget, but the question for the energy industry is whether the Chancellor will find the head room for measures that seek to reignite investment in UK energy.

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