UK Energy Windfall Tax Hike Risks Slowing Growth, Oil Industry Warns of Economic Impact

The UK government’s plan to raise the Energy Profits Levy on oil and gas companies to 78% in November has drawn sharp criticism from the industry. The sector warns that the increased tax could hinder economic growth, reduce investment, and threaten thousands of jobs.

UK's Energy Windfall Tax Increase to 78% Sparks Fears of Reduced Investment and Job Losses

According to government plans, the Energy Profits Levy, which is the official name of the windfall tax, is scheduled to increase from 35% to 38% on 1 November on the profits of oil and gas enterprises in the UK.

Companies that conduct business in the North Sea are already subject to distinct taxation regimes. They are subject to a 30% corporation tax on profits and an additional 10% rate.

This implies that the total tax rate on profits generated by energy companies in the United Kingdom is anticipated to increase by 78% beginning in November, per BBC.

The government has also declared its intention to extend the levy until 2030 and "tighten" investment allowances, which have enabled companies to reduce the tax they pay by investing in projects, such as renewable energy, in the North Sea.

The industry's capacity to "support the government's overarching goal of driving economic growth" would be "undermined" by the policy changes, according to OEUK.

The analysis conducted by the industry body asserted that:

• The expected tax take from oil and gas producers would "increase in the very short term" by £2bn but later result in a £12bn loss in receipts.
• A "rapid decline" in investment from £14bn under the current tax policy to £2bn by 2029.
• Due to projects not progressing, about 35,000 jobs would be at risk in 2029 alone.

"This is a government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy," said David Whitehouse, OEUK chief executive.

UK Oil and Gas Sector Urges Government Action as High Tax Rates Threaten Jobs and Investments

According to Mr. Whitehouse, the corporation tax rate that UK oil and gas companies have paid has been "three times" that of any other sector for over two years.

"Time is running out to mitigate damage that has already been done and to avoid further escalation," he added. "The prime minister promised to manage the North Sea in a manner that does not jeopardize jobs.

"We now need an honest conversation on how we can do this and need government to work with the sector at pace."

May 2022 marked the initial implementation of the Energy Profits Levy by former Prime Minister Rishi Sunak.

Energy companies experienced substantial profits due to the increase in oil and gas prices following the cessation of COVID-19 lockdowns and the subsequent surge in prices following Russia's invasion of Ukraine.

The government faced mounting pressure to help as households were subjected to excessive energy bills. The windfall tax was implemented to help finance a program to limit electricity and gas bills. However, this initiative has since been discontinued.

Energy prices have decreased since the 2022 peaks but continue to be elevated. Starting in October, the average annual household energy expenditure will increase by 10%.

OEUK said the original EPL introduced was intended to be a "temporary tax in response to the economic environment at the time."

"These unprecedented oil and gas prices have since returned to align with long-term real averages, and the windfall conditions that the EPL was designed to address have passed," it said.

A Treasury spokesperson said: “We are committed to maintaining a constructive dialogue with the oil and gas sector to finalize changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea.

"Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future.”