UK Oil & Gas sector struck by windfall tax

4C Offshore | Tom Russell
By: 26/05/2022
The UK Chancellor of the Exchequer, Rishi Sunak, has announced a new Energy Profits Levy which includes a new 25% surcharge on profits for the oil and gas sector. The new Energy Profits Levy is expected to raise around £5 billion over the next year to help with the rising cost of living.

Currently, the oil and gas sector pay a 40% headline rate tax on profits consisting of 30% Ring Fence Corporation Tax and 10% Supplementary Charge. The Energy Profits Levy is an additional 25% tax on UK oil and gas profits on top of the existing 40% headline rate of tax, taking the combined rate of tax on profits to 65%.

The tax will take effect from today, 26 May 2022, and will be legislated for via a standalone Bill to be introduced shortly.
In future years, if oil and gas prices return to historically more normal levels, the Government will phase out the Energy Profits Levy, and also the legislation will include a sunset clause, effective at the end of December 2025.
The government has also been clear that it wants to see the oil and gas sector reinvest its profits to support the UK’s energy security.

To encourage this, a ‘super-deduction’ style investment allowance will be introduced within the levy to provide an immediate incentive for the oil and gas sector to invest in UK extraction.

The new investment allowance rate is 80% and means the total tax relief on investment nearly doubles - for every £1 businesses invest they will overall get a 91p tax saving.

The levy does not apply to the electricity generation sector. However, according the UK government announcement, it is consulting with the power generation sector and investors to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production. Those reforms will take time to implement. In the meantime, the government will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take.

Concerns are now being raised over whether the new Energy Profits Levy will impact investment in renewable energy from oil and gas majors.

Deirdre Michie, Chief Executive of  trade body Offshore Energies UK, said:  “In April we welcomed the government’s British Energy Security Strategy, which pledged ‘Secure, clean and affordable British energy for the long term’. We thought long-term meant years or decades, but it seems to have meant just a few weeks.

“The strategy’s focus was on attracting investment to build a greener energy system to reduce dependence on imports. These new taxes will achieve the exact opposite of what the government promised in April.

“They will drive away investors and so reduce UK energy production. That means less oil, less gas, and less renewables. It also makes it much harder for the UK to reach net zero by 2050.”

In April, the UK Prime Minister Boris Johnson unveiled ambitious new targets for the roll out of renewables, hydrogen and nuclear energy. The plan aims to boosts Britain’s energy security with the Prime Minster citing concerns of rising global energy prices and volatility in international markets

The new plan includes a new offshore wind target of up to 50GW by 2030 – more than enough to power every home in the UK – of which 5GW is come from floating offshore wind in deeper seas.

The Prime Minister also aims to double the low carbon hydrogen production capacity to up to 10GW by 2030, with at least half coming from green hydrogen and utilising excess offshore wind power to bring down costs.

Nuclear ambitions have also been raised to 24GW by 2050.