The UK government has declared that, if oil prices drop to their usual levels for an extended period of time, the windfall tax on oil and gas companies would be suspended. By removing the windfall tax, the overall tax rate for energy companies would drop from 75% to 40%.
The windfall tax targeted businesses, that gain from something they were responsible for. It was established last year to assist in financing a plan to reduce energy costs for homes and businesses.
Profits of energy companies have increased recently, first, as a result of increased demand after Covid limits ended, and later as a result of higher costs for energy brought on by Russia’s invasion of Ukraine, but oil and gas prices have now drop.
The windfall tax, according to a statement from the Treasury department, would last until March 2028, but the rate could decrease, if the median cost of oil and gas falls to, or below, a predetermined threshold for two successive three-month periods.
Moreover, oil and gas prices have been fixed at $71.40 per barrel and £0.54 per therm, respectively. As at today, Brent crude oil traded at $75 per barrel, with gas costing about £0.62. Also, energy companies have been pleading with the government to lower the windfall tax, because they claim it is driving businesses to reduce investment.
The largest oil and gas producer in the UK, Harbour, announced in April that, the windfall tax would cause it to eliminate 350 onshore employments in the UK. Additionally, due to the continuation of the windfall tax, French oil firm, Total Energies announced it would reduce its anticipated 2023 North Sea investment by a quarter, or £100 million.
According to the Treasury, its decision had taken these concern into account. According to the report, any decrease in investment, “puts the long-term future of the UK’s domestic supply at risk, meaning we would be forced to import more from abroad at a time when reliable and affordable energy is a focus for families and businesses.”
Windfall Tax Operation
In May of last year, during his time as chancellor, Prime Minister Rishi Sunak established the Energy Profits Levy at a 25% rate. Current Chancellor Jeremy Hunt indicated in the fall that, it would rise to 35% starting in January 2023.
The levy only applies to earnings made from UK oil and gas extraction, however, it does not apply to income made from other industries, such as oil refining and forecourt sales of gasoline and diesel.
The North Sea’s oil and gas companies currently pay a 30% corporate tax on their revenues, plus an additional 10% rate. In light of the windfall tax, the overall tax burden placed on oil and gas corporations now stands at 75%. The overall tax rate on energy companies would revert, if it were repealed.
Offshore Energies UK, a trade organization, praised the decision, but cautioned that the sector is still faced with difficulties. “This is a step in the right direction, but many more will need to be taken to restore confidence to our sector,” its Chief Executive David Whitehouse claimed. We will now collaborate carefully with the government and financiers to comprehend the measure’s specifics, and its capacity to unlocking our investment.
The Green Party, however, voiced its opposition to the potential suspension of the windfall tax.
“The government seems happy to allow these huge corporations to not only wreck the climate, but to profit off the back of the cost-of-living crisis which they themselves have contributed to. Instead, the government should be tightening the tax, closing the loopholes and ensuring the money raised helps people through the cost-of-living crisis and funds the sustainable green energy jobs in the renewable sector we urgently need.”Green co-leader, Adrian Ramsay.