Despite some early optimism ahead of Labour’s Autumn Budget 2025, there is shared disappointment across the sector that the fiscal position for oil and gas remains challenging. At our event last week, kindly hosted by Herbert Smith Freehills Kramer, we welcomed the clear and timely breakdown from Aurell Taussig (Tax Partner at HSFK) who walked us through the key changes announced and what they mean in practice for operators and investors.
A New Reality for the Energy Profits Levy
Despite industry hopes that the Energy Profits Levy (EPL) would be wound down, the government confirmed that the levy will continue until March 2030 – unless terminated earlier under the energy security investment mechanism, should oil and gas prices fall below the established floor.
The most significant development was the announcement of a new, permanent Oil and Gas Price Mechanism, which will replace the EPL. This is a major disappointment for those in the industry who have been campaigning for the EPL to be scrapped early and not replaced. The EPL was intended to be temporary but is now effectively becoming permanent.
The government noted that current oil and gas prices suggest the EPL price floor may be triggered in the next few years. If breached, the EPL would end immediately and the new mechanism would take effect, returning the headline tax rate to 40%. The new mechanism will apply only when oil and gas are sold above threshold prices: $90 per barrel for oil and 90p per therm for gas.
A Revenue-Based Model Moving Forward
After consulting earlier this year, the government confirmed it will proceed with a revenue-based rather than profit-based model. Key features include:
– A 35% rate triggered when realised prices exceed threshold levels – $90/barrel for oil and 90p/therm for gas – with thresholds indexed annually to CPI
– Tax assessed per transaction, creating significant administrative and data-tracking challenges
– Ongoing complexity surrounding hedging treatment, with the government acknowledging difficulties in attributing hedging outcomes on a transaction-by-transaction basis
The government emphasised that the model aims to capture windfall prices and will not provide additional deductions for exceptional costs – something likely to heighten pressure for operators already facing cash-flow constraints.
Decommissioning Relief Deeds and Capital Allowances
The government confirmed that no payments can arise under Decommissioning Relief Deeds (DRDs) for expenditure taxed under the EPL. Legislation will be introduced to formalise this position.
Separately, capital allowances are set to change:
– The main writing-down allowance will fall from 18% to 14% from April
- A new 40% first-year allowance will be introduced from January
These adjustments could influence investment decisions for capital-intensive projects.
Refining Sector and the Carbon Border Adjustment Mechanism
The Budget also announced a call for evidence on the future of the UK refining sector, recognising its importance for energy security. In addition, the government is considering whether to include refined products within the UK’s forthcoming Carbon Border Adjustment Mechanism (CBAM), due in 2027, which would impose a carbon cost on imports comparable to that paid domestically.
In Summary
Labour’s Autumn Budget 2025 signals a firm commitment to a more interventionist and transition-driven fiscal approach for the oil and gas sector. While framed around fairness and energy security, the continued and increasingly permanent nature of the “windfall” tax regime raises ongoing concerns around investment competitiveness, job retention, and the UK’s longer-term energy independence.