An expected hike in the windfall tax on oil and gas could result in the Treasury paying more in tax relief to companies investing in the North Sea than the value of the investment itself.
Chancellor Jeremy Hunt is considering increasing the emergency levy from 25 to as much as 35 per cent of profits from oil and gas extraction in his Autumn Statement on Thursday, to raise £45bn over the next five years.
The mooted announcement – also expected to extend the Energy Profits Levy to 2028 from its current end-date of 2026 and to bring in electricity generators for the first time – has sparked warnings that companies could scrap investment plans worth billions.
But researchers from anti-fossil fuel campaign Uplift calculate that, unless rules are changed, a quirk in the way the levy is designed could actually mean taxpayers stumping up more in relief on investment projects than the investment is worth.
Energy giants currently getting 91p in relief for every £1 they invest could instead receive 109p under the new regime, effectively meaning the taxpayer is paying for the investment and handing over a further 9 per cent of its value in additional relief.
The relief has helped firms offset the impact of the levy on eye-watering profits, which reached £7.1bn for BP and £8.2bn for Shell over a single three-month period as the Ukraine war sent prices soaring. Shell is understood to have paid no tax on its UK profits thanks to this and other subsidies.
In the case of the huge new Rosebank oil field off the coast of Shetland, Uplift’s calculations suggest that Equinor and its partners will effectively pick up over half a billion pounds in UK government subsidy to develop the field.
It comes as the COP27 summit in Egypt debates proposals to phase out subsidies for fossil fuel extraction in the drive to rein in global warming.
Uplift director Tessa Khan said: “When UK households are facing soaring energy bills, and many millions will be forced into fuel poverty this winter, it is unconscionable that this government is effectively handing billions in taxpayer subsidies to oil and gas companies raking in record profits.
“New oil and gas projects won’t do anything to lower our energy bills: most of what’s being subsidised in the North Sea is oil for export and will just result in more profits for oil executives.
“This glaring loophole needs to be closed. This isn’t a difficult decision, chancellor. Stand up for British taxpayers and close up this loophole. If that means standing up to profiteering oil and gas companies, so be it.”
The loophole arises because of the complex structure of tax reliefs on North Sea investments.
Under long-standing arrangements, companies are entitled to 46.25p relief for every pound they invest offshore.
Mr Sunak’s Energy Profits Levy included an additional “capital allowance” relief of 100 per cent of the 25p levy and an “investment allowance” of 80 per cent – a total of 45p for every pound invested, bringing the overall relief to 91.25p in the pound.
If these remain unchanged as the levy rises to 35 per cent, it will bring the windfall tax reliefs to 63p and the total claimable by companies to 109.25p for every pound invested.
A Treasury spokesperson refused to comment on Mr Hunt’s plans for the windfall tax in Thursday’s statement.
But the spokesperson said: “The Energy Profits Levy is expected to raise £17 billion this year and next to help fund cost-of-living support for 8 million people.
“We also want to see the sector reinvest its profits to support the economy, jobs, and our energy security, which is why the more investment a firm makes into the UK, the less tax they will pay.”
Trade body Offshore Energies UK said oil and gas producers were already paying taxes of 40 per cent on their profits, which was increased to 65 per cent by the Energy Profits Levy and would rise to an eye-watering total of 75 per cent if the windfall tax hits 35 per cent.
They warned that a “supertax” of this kind would hit investment, undermining the energy security of the UK, which still relies on gas and oil for 75 per cent of its energy.
A spokesperson said the industry was “completely taken aback” by the chancellor’s readiness to consider increasing the levy.
“Our industry plays a critical role in providing reliable and responsible supplies of energy to the UK, with all the benefits that brings in generating taxes, secure energy and jobs for UK workers,” he said.
“Driving investment out of UK waters into other countries will increase reliance on imported energy, reduce the tax flow to the Exchequer, and make it even harder to increase our domestic production of lower-carbon energies.
“We need a diverse range of offshore operator and supply-chain companies with the skills and people to build the low-carbon energy future we all want to see. It deeply concerns us that that the complexity of the UK offshore energy sector is not being considered when we are on the cusp of such an important transition.”
Responding to OEUK’s concerns, the Treasury spokesperson said: “Our permanent oil and gas tax regime is globally competitive and our approach to taxing profits from oil and gas exploration balances attracting investment with ensuring a fair return for the nation for the use of its resources.”