Windfall tax suspension possible for energy firms amid falling oil prices
The UK government has declared its intention to suspend the windfall tax on oil and gas companies if prices return to normal levels for a sustained period. This move would reduce the overall tax rate on energy firms from 75% to 40%. The windfall tax was introduced last year to fund a scheme aimed at reducing energy bills for households and businesses. The tax has been under scrutiny as energy firm profits have soared recently due to rising demand following the lifting of Covid restrictions and the impact of Russia’s invasion of Ukraine on energy prices.
The Treasury announced that the windfall tax would remain in place until March 2028, but the tax rate would decrease if average oil and gas prices fall to or below a set level for two consecutive three-month periods. The levels have been set at US$71.40 per barrel for oil and £0.54 per therm for gas. As of Friday morning, Brent crude oil was trading at US$75 per barrel, with gas prices around £0.62.
Energy companies have been urging the government to reduce the windfall tax, warning that it has led to a decrease in investment. In response to the tax, Harbour, the UK’s largest oil and gas producer, announced it would cut 350 UK onshore jobs. French oil giant TotalEnergies also revealed plans to reduce its 2023 North Sea investment by £100m due to the extension of the windfall tax.
The Treasury stated that its decision took these concerns into account, acknowledging the potential risk to the UK’s long-term domestic supply and the increased reliance on imports. The Energy Profits Levy, introduced by Prime Minister Rishi Sunak in May last year when he was chancellor, initially had a rate of 25%. This was later increased to 35% by current Chancellor Jeremy Hunt, effective from January 2023.
The levy applies to profits made from extracting UK oil and gas but excludes other activities such as refining oil and selling petrol and diesel on forecourts. With the windfall tax, the overall tax rate faced by oil and gas companies is 75%. If the tax is suspended, the overall tax rate would return to 40%.
Trade body Offshore Energies UK welcomed the announcement but cautioned that the industry still faces challenges. Chief Executive David Whitehouse said, “This is a step in the right direction, but many more will need to be taken to restore confidence to our sector.”
Critics of the possible suspension of the windfall tax include the Green Party and Greenpeace UK. Green Party co-leader Adrian Ramsay argued that the government should be tightening the tax and using the funds to help people through the cost-of-living crisis and support sustainable green energy jobs. Greenpeace UK’s climate campaigner, Georgia Whitaker, called for a permanent increase in the tax on oil and gas companies to help insulate homes and transition the UK to cheap, clean energy.
