Energy profits levy set to raise £5bn
Following calls for a windfall tax on oil and gas companies, the Chancellor has announced a 25% energy profits levy, set to raise £5bn in year one, effective from today
The measure is designed to help fund more cost-of-living support for UK families and is a 25% surcharge on the extraordinary profits the oil and gas sector is making.
Chancellor Rishi Sunak said: ‘The oil and gas sector is making extraordinary profits as a result of surging global commodity prices. I am sympathetic to the argument of taxing those profits but as ever there is a sensible middle ground.
‘The temporary energy profits levy will be coupled with a new investment allowance similar to the super deduction so companies have an incentive to reinvest.
‘The energy profits levy will be a rate of 25% tax on profits. With the new investment allowance this will nearly double the investment relief for oil and gas companies. We understand also that certain parts of the electricity generation industry are making extraordinary profits. We are consulting with the power generation companies to make sure electricity prices are fairer to ensure that the price paid for electricity is more reflective of the costs of production.
‘The energy profits levy will raise around £5bn in the first year.’
The Chancellor confirmed that changes to electricity pricing would be a long-term plan, but in the meantime, ‘the government will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take’.
The government is also clear that it wants to see the oil and gas sector reinvest its profits to support the economy, jobs, and the UK’s energy security.
The new ‘super-deduction’ style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK.
The new 80% investment allowance will mean businesses will overall get a 91p tax saving for every £1 they invest – providing them with an additional, immediate incentive to invest. This nearly doubles the tax relief available from the current 46p in the pound and means the more investment a firm makes, the less tax they will pay. The levy does not apply to the electricity generation sector.
The current 10% supplementary charge provides companies with an investment allowance that can only be claimed once income is received from the field subject to the investment (which can take several years).
In contrast, the new 80% investment allowance for the energy profits levy will be available to companies at the point of investment, making it both more immediate and more generous.
Heather Self, partner at Blick Rothenberg, said: ‘The levy will be set at a high rate of 25% but will be offset by additional capital allowances for investment, which will reduce the overall impact – and will add yet more complexity to the tax system.
‘It will include a ‘sunset clause’, so that it will expire automatically after an initial period – but sunset clauses can be difficult to implement in practice, and we all know that income tax itself was introduced as a temporary tax over 200 years ago.’
The government expects the combination of the levy and this investment allowance to lead to an overall increase in investment, and the Office for Budget Responsibility (OBR) will take account of this policy in their next forecast.
Currently, the oil and gas sector pays a 40% headline rate tax on profits consisting of 30% ring fence corporation tax and 10% supplementary charge.
In recent years, under the existing regime, fewer than 35 groups have made tax payments each year. In 2021, the top seven groups accounted for around 95% of payments.
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%.
To appropriately tax the extraordinary profits, companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy.
The tax will take immediate effect from 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.
Chris Sanger, EY’s head of tax policy, said: ‘Today’s action, whilst not technically a windfall tax, has raised the tax rate on oil and gas profits to over three times that of other businesses. The Chancellor will be hoping that today’s actions will be seen as a response to extraordinary times, rather than an indication of an unpredictable investment landscape.
‘The added super-deduction and the sunset clause will go some way to achieving this, but the real answer will be shown in the longer-term investment plans. For that, we will have to wait.’
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, said: ‘As Chancellor Rishi Sunak perfected his u-turn on a windfall tax, the share prices of BP and Shell also looped lower, before climbing back up, as investors shrugged off its impact given that it is expected to be a short lived hit.
‘It may mean dividends are pushed lower temporarily, but given that tax will reduce if companies invest more, it’s likely to mean an acceleration of investment by BP and Shell, a strategy which will be welcomed by many investors who see environmental progress and not just shareholder pay-outs as crucial for their long term growth prospects.’
John O’Connell, chief executive of the TaxPayers’ Alliance, said: ‘It’s understandable that politicians want to support households struggling thanks to soaring energy prices, but a windfall tax is not the answer.
‘Taxpayers need the country back on its feet, and arbitrary new taxes make the UK an unsafe investment bet long into the future.
‘Instead of taking potshots at businesses, the Chancellor should reduce the burden of regulations and green subsidies that push up the price of energy.’
Story by Sara White from Accountancy Daily