£15bn cost of living help and £5bn windfall tax
Chancellor Rishi Sunak today unveiled a higher than expected £15 billion package of support to help households cope with rising energy and food bills – partly paid for by a £5bn windfall tax on oil and gas company profits.
Almost eight million of the most vulnerable households across the UK will receive support of at least £1,200 this year, including a new one-off £650 cost of living payment
The October discount on energy bills is doubled to £400 and the requirement to repay it over five years is scrapped.
An Energy Profits Levy on oil and gas firms – the windfall tax – will raise around £5bn over the next year, with a new 80% investment allowance to encourage firms to invest in oil and gas extraction in the UK. Despite speculation, there is no plan to impose the levy on electricity generators.
The new levy will be charged on oil and gas company profits at a rate of 25% and is expected to raise around £5 billion in its first 12 months, which will go towards easing the burden on families. It will be temporary, and if oil and gas prices return to historically more normal levels, will be phased out.
The new Investment Allowance, similar in style to the super-deduction, incentivises companies to invest through saving them 91p for every £1 they invest. This nearly doubles the tax relief available and means the more a company invests, the less tax they will pay.
The government expects the combination of the levy and the new 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.
The levy does not apply to the electricity generation sector – where extraordinary profits are also being made due to the impact that rising gas prices have on the price paid for electricity in the UK market.
As set out in the Energy Security Strategy the government 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.
BP warned it would now review its plans in the light of the levy, which is set to stay in place for up to three years, though the Treasury said it would be phased out when oil prices return to historically normal levels.
In a statement, the company said: “Today’s announcement is not for a one-off tax – it is a multi-year proposal. Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.”
The levy left business groups disappointed. Rain Newton-Smith, CBI Chief Economist, said: “Despite the investment incentive, the open-ended nature of the energy profits levy – and the potential to bring electricity generation into scope – will be damaging to investment needed for energy security and net zero ambitions.
“It sends the wrong signal to the whole sector at the wrong time against a backdrop of rising business taxation elsewhere.”
Ryan Crighton, policy director at Aberdeen & Grampian Chamber of Commerce, said: “In the short-term, taking an additional £5billion from a sector already taxed at 40% will achieve very little apart from making the North Sea – already one of the world’s most mature basins – less attractive to investors.
“Tax and fiscal stability, above all else, really matter in a globally competitive investment market, and today we’ve shot ourselves in the foot.
Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “It is extremely disheartening that the UK Government have chosen to introduce this additional levy which will inevitably deter investment and make Scotland and the UK a less attractive market internationally.”
To ensure there is support for everyone who needs it, Mr Sunak also announced a £500 million increase for the Household Support Fund, delivered by Local Authorities, extending it from October until March 2023. This brings the total Household Support Fund to £1.5bn.
It takes the total direct government cost of living support to £37bn.
Mr Sunak said: “We know that people are facing challenges with the cost of living and that is why today I’m stepping in with further support to help with rising energy bills.
“We have a collective responsibility to help those who are paying the highest price for the high inflation we face. That is why I’m targeting this significant support to millions of the most vulnerable people in our society. I said we would stand by people and that is what this support does today.
“It is also right that those companies making extraordinary profits on the back of record global oil and gas prices contribute towards this. That is why I’m introducing a temporary Energy Profits Levy to help pay for this unprecedented support in a way that promotes investment.”
The Treasury said there is now more certainty that households will need further support, with inflation having risen faster than forecast and Ofgem expecting a further rise in the energy price cap in October.
Today’s announcement is on top of the government’s existing £22bn cost of living support, which includes February’s energy bills intervention and action taken at this year’s Spring Statement, including a £330 tax cut for millions of workers through the NICs threshold increase in July and 5p cut to fuel duty.
During the announcement, the Chancellor also set out the government’s strategy to control inflation through independent monetary policy, fiscal responsibility, and supply side activism – a plan he said should see inflation come down and returning to its target over time.
How will the Energy Profits Levy work?
- 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.
- In recent years, under the existing regime, fewer than 35 groups have made tax payments each year. In 2021, the top 7 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.
- It is expected to raise around £5 billion in its first 12 months.
- 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.
How the new Investment Allowance will work?
- The government has also been clear that it wants to see the oil and gas sector reinvest their profits to support the economy, jobs and 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 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.
- The government expects the combination of the levy and this investment allowance to lead to an overall increase in investment, and the OBR will take account of this policy in their next forecast.
Overall, the tax relief companies receive from qualifying expenditure will nearly double, from 46p for every £1 of extra investment to 91p
Further facts and background
- There is precedent for taxes on exceptional profits. For example, in 1981, a one-off tax on certain bank deposits was introduced via a 2.5% levy on deposits of banking businesses, who were benefiting from high interest rates.
- The permanent 40% headline tax rate for oil and gas producers is competitive globally against similar operating environments, and is lower than Norway, the Netherlands and Denmark. The Energy Profits Levy is an additional tax which reflects the extraordinary global context.
Existing UK oil and gas tax regime
The UK oil and gas fiscal regime taxes profits earned by companies from the production of oil and gas on the UK Continental Shelf. The regime is kept separate to other taxes on commercial profit by the operation of a “ring fence” which prevents losses from other activities being imported into the regime. The current headline rate of tax is 40%, made up of the following taxes:
- 30% Ring Fence Corporation Tax (RFCT) – this is a tax on profits from exploration and production in the UK, largely on the same basis as normal corporation tax rules. This has not changed since the Supplementary Charge was introduced in 2002.
- 10% Supplementary Charge (SC) – this is an additional charge of 10% on adjusted ring-fence profits, excluding finance costs. It has remained unchanged since 2016 (when it was reduced from 20% to 10%). The rate peaked at 32% between 2011 and 2014.
- 0% Petroleum Revenue Tax – a field-based tax charged on profits arising from fields given development consent before 16 March 1993. It has been zero-rated from 2016 but not abolished to allow companies to carry back losses arising from trading and decommissioning.