Oil bonanza sparks windfall tax row
ENERGY giants are awash with cash as soaring prices deliver bumper profits.
Meanwhile, chilly consumers fear turning up their thermostats as they worry about bills.
It seems a no-brainer, therefore, to ask oil and gas firms to divert gushing profits to help households – especially as the Government is hard-pressed to fund a relief package.
So runs the argument for a windfall tax.
But what will that mean in practice? And what will be the consequences of squeezing even more out of the firms?
Recent company results have only intensified calls for action as bottom lines are swollen by a surge in oil and gas prices – and shareholders showered with rewards.
BP has hoovered up nearly £20bn in the first nine months of this year while Shell managed to rake in a £26bn profit haul over the same period.
What has happened so far?
Energy companies are already on the hook for billions after a windfall tax was introduced earlier this year.
Even before that, profits on North Sea oil and gas were subject to a 30pc rate of corporation tax, higher than the current rate of 19pc for other businesses. On
top of that is a 10pc so-called ‘supplementary charge’.
In May, then-chancellor Rishi Sunak bowed to pressure to introduce a 25pc windfall tax on oil and gas companies to pay for cost of living measures.
That took the tax rate on those companies to 65pc.
In September, the Treasury estimated it would net £7.7bn for 2022-23 and a total of £28bn
before a ‘sunset clause’ ends the levy at the end of 2025.
BP expects to pay just under £700m this year as a result of the windfall tax.
However, Shell has not paid anything – thanks to tax breaks from its investments in the North Sea – though the company predicts charges will kick in next year. That was because Sunak’s plan allowed companies to reclaim 91p in tax relief for every £1 invested to boost energy supplies.
What might happen now?
Since the original windfall tax was announced, the Government has frozen bills for six months over the winter at a cost of £60bn.
That leaves the new Chancellor, Jeremy Hunt, facing difficult choices about where he can cut public spending or instead raise taxes.
With profits piling up at the energy firms, they look a tempting target.
Reports suggest that the levy will increase from 25pc to 30pc, taking the overall tax rate on North Sea energy businesses to 70pc. The 2025 time limit on the tax could also be pushed out to 2028.
What does Labour want?
Ed Miliband, Labour’s climate spokesman, has called for a ‘proper windfall tax’.
His party wants the existing windfall tax to be backdated to January and for the tax reliefs for investment to be scrapped. Labour claims this would raise £8bn a year. But its plans are light on detail.
So what does industry have to say?
Shell boss Ben van Beurden, who is due to step down at the end of this year, has said the industry must accept that it may be targeted for tax raising and should ‘embrace it’.
But Chris O’Shea, boss of British Gas owner Centrica – which also has interests in North Sea production
– has said the windfall tax is like ‘burning the furniture to stay warm’.
This week, North Sea industry body Offshore Energies UK wrote to the Chancellor to express disquiet about reports of plans for the windfall tax.
‘The ongoing uncertainty and continuous changes to the fiscal regime are driving investment out of the UK and also encouraging some companies to exit,’ said OEUK chief executive Deirdre Michie.
What are the pros and cons?
George Dibb of the Institute for Public Policy Research, a centreLeft think-tank, said it was ‘unacceptable’ for the likes of Shell and BP to be rewarding investors with pay-outs ‘when these companies are making windfall profits from our rising energy bills’.
It is calling for a 25pc windfall tax on share buybacks for the two firms – to raise up to £4.8bn a year – copying a smaller such tax of just 1pc introduced by President Joe Biden in the US.
But Andy Mayer, energy analyst at the Institute of Economic Affairs, said a renewed raid on energy firms was not the answer to the UK’s problems.
‘Further UK windfall taxes won’t fix this – 65pc is high enough – and will likely damage investment,’ he said.