UK Oil & Gas sector struck by windfall tax
By:
Tom Russell
26/05/2022
gov.uk
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.
