The government has announced that the windfall tax on oil and gas companies will be repealed if prices fall to normal levels for an extended period of time.
Stopping the windfall tax will reduce the overall tax rate for energy companies from 75% to 40%.
A windfall tax is used to target businesses that benefit from something for which they were not responsible.
It was launched last year to help fund a program to reduce family and corporate energy prices.
Profits at energy companies have recently skyrocketed, first due to increased demand after Covid limits were loosened, and subsequently due to Russia’s invasion of Ukraine, which hiked energy prices.
However, oil and gas prices have since fallen from their highs.
How much windfall tax do oil companies pay?
What is the energy cap, and what is the status of bills?
The Treasury stated in a statement that the windfall tax, known as the Energy Profits Levy, will be phased out if average oil and gas prices fall to or below a predetermined level for two consecutive three-month periods. If not, the tax will be in effect until March 20, 2028.
The price of oil has been set at $71.40 per barrel and gas at £0.54 per therm.
On Friday morning, Brent crude oil was selling at $75 a barrel, with gas prices hovering around £0.62.
Energy businesses have urged governments to decrease the windfall tax, claiming that it is leading companies to curtail investment.
Harbour, the UK’s largest oil and gas producer, announced in April that the windfall tax will result in the loss of 350 UK onshore employment. TotalEnergies, the French oil giant, also said that it will reduce its planned 2023 North Sea investment by a quarter, or £100 million, due to the extension of the windfall tax.
The Treasury stated that their conclusion reflected these concerns.
It stated that any decrease in investment “endangers the long-term future of the UK’s domestic supply, forcing us to import more from abroad at a time when reliable and affordable energy is a priority for families and businesses.”
“We need a proper windfall tax on the enormous profits of oil and gas giants to help ease the cost of living crisis,” a Labour spokesperson stated.We will investigate the specifics of this move. Of course, if the wartime windfalls evaporate, we’ll consider what the best long-term tax posture for the North Sea should be.”
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How does the windfall tax function?
When he was chancellor, Prime Minister Rishi Sunak introduced the Energy Profits Levy in May of last year, at a 25% rate.
Current Chancellor Jeremy Hunt indicated in the autumn that it would rise to 35% in January 2023.
Profits from extracting UK oil and gas are subject to the levy, but profits from other activities, such as refining oil and selling fuel and diesel on forecourts, are exempt.
Oil and gas companies operating in the North Sea currently pay 30% corporation tax on profits, with an additional 10% rate on top of that.
With the windfall tax, the overall tax rate for oil and gas businesses is 75%.
If it is repealed, the overall tax rate on energy companies will return to 40%.
Offshore Energies UK praised the announcement but stressed that the industry still faced obstacles.
Its CEO, David Whitehouse, stated, “This is a step in the right direction, but many more will be required to restore confidence in our sector.”
“We will now collaborate closely with the government and lenders to understand the specifics of the measure and its effectiveness in stimulating investment.”
Shell, the world’s largest oil and gas company, also hailed the announcement. According to a spokeswoman, the agreement “should help to improve investor confidence in the UK North Sea, which will continue to be critical to maintaining Britain’s energy security in the coming years.”
The Green Party, on the other hand, criticized the modification to the windfall tax.
“The government appears content to allow these massive corporations to not only wreck the climate, but also profit from the cost-of-living crisis that they themselves have contributed to,” Green co-leader Adrian Ramsay said.
“Instead, the government should tighten the tax, close the loopholes, and ensure that the money raised helps people overcome the cost-of-living crisis and funds the sustainable green energy jobs in the renewable sector that are desperately needed.”
Georgia Whitaker, Greenpeace UK’s climate campaigner, stated, “Regardless of what happens to the price of oil and gas, the tax these companies pay should be higher, permanently.”
“Rather than filling the bank accounts of already wealthy shareholders, this money should be used to help insulate homes and transition the UK to cheap, clean energy.”
