Hartshead Resources NL (ASX:HHR) believes it will benefit materially from the UK Energy Profits Levy, announced by the UK Government on May 26, 2022.
HHR will be the beneficiary of tax relief resulting from the New Investment Allowance on its investment in the Phase I development of the Anning and Somerville gas fields in the UK Southern Gas Basin.
“We are pleased to announce that Hartshead is set to receive incentives under the new UK oil & gas sector windfall tax, further increasing the attractiveness of the project to potential industry partners," Hartshead CEO Chris Lewis said.
"The Tax Levy represents a strong commitment from the UK Government and reiterates their commitment to energy security both within the UK, but also within Europe.”
About the Windfall Tax
In its bid to support the UK’s oil and gas sector, the UK government introduced the new Windfall Tax, which introduces an additional 25% tax, thereby taking the total combined tax rate to 65%.
Prior to this, the UK oil & gas fiscal regime consisted of three elements:
- Ring-Fenced Corporation Tax (RFCT) – 30%;
- Supplementary Charge Tax (SCT) – 10%; and
- Petroleum Revenue Tax (PRT) – 0% from 2016.
The Windfall Tax will end on December 31, 2025, due to a sunset clause but will be phased out earlier if oil and gas prices revert to historically normal levels.
The new tax sends a strong message regarding UK energy security and the government’s support of those wishing to invest in the UK oil and gas sector by effectively super-charging the tax relief available on capital expenditure.
It is highly appealing to companies, such as Hartshead, which is in the development stage, noting that previous losses, decommissioning costs and financing costs are non-deductible for the purposes of the new Windfall Tax.
There is considerable relief in the new tax available for oil and gas investments with an additional 80% allowance for investment expenditure, in addition to the existing 100% relief resulting in a total of 180% of capital expenditure being available for tax relief in the year of expenditure.
The overall level of tax relief increases from 46.25 pence to 91.25 pence for each £1 of new investment.
Final investment decision on horizon
Late in May, Hartshead announced it had submitted its Phase I Concept Select Report (CSR) for the Anning and Somerville gas fields to the North Sea Transition Authority (NSTA).
HHR is aiming to take a Final Investment Decision (FID) in 1H 2023 following further work to progress the Phase I development through the Concept Define/FEED stage.
The company is in strong shape.
Following FID, the material capital expenditure that Hartshead, and any potential industry partner will invest in the Phase I development, will benefit directly from the tax relief arising from the new investment allowance.
Also of note is that Hartshead will not be subject to the additional 25% Windfall Tax on its Phase I production as due to previous years' losses, it will not start paying tax liabilities until FY2028, which is after the Windfall Tax expiration date of December 31, 2025.