UK increases, extends upstream oil and gas windfall tax

The UK is to increase its temporary windfall tax on oil and gas producers by 10 percentage points, the country's finance ministry confirmed today.

The plan, much trailed in recent days, was confirmed by finance minister Jeremy Hunt in his autumn budget statement. From 1 January 2023, the Energy Profits Levy — which was introduced in May in response to what Hunt today described as a "made-in-Russia" energy crisis — will increase from 25pc to 35pc. It will now run until March 2028, an extension of two years.

Ahead of the Hunt's autumn statement, offshore industry body OEUK said a windfall tax increasing from 25pc to 35pc would lead to an effective tax rate on the offshore industry of 75pc, which would be "a rate so high that many oil and gas producers would have to reconsider investment plans worth billions".

But the UK government plans to stick with tax relief measures that accompany the levy.

"To continue encouraging companies to reinvest their profits in the UK, we will maintain the existing cash value of the levy's investment allowance," the Treasury said. It has adjusted its tax relief rates for profits reinvested, so companies will be able to claim £91.40 in tax relief for every £100 invested rather than the previous £91.25.

Among the UK offshore's major operators, BP and TotalEnergies expect to pay additional taxes amounting to $1.8bn between them in 2022, but Shell, having reinvested large amounts in the region this year, has effectively avoided the windfall tax.

In addition, the Treasury said today that decarbonisation expenditure by offshore operators would continue to qualify for the current investment allowance rate of 80pc. This spending includes investments to reduce Scope 1 and 2, or operational, emissions such as modifying existing installations to use power from offshore wind farms, installing bespoke wind turbines to power the installation or running electricity cables from shore.

This decarbonisation allowance will allow a company spending £100 on upstream decarbonisation to recover £109.25 in tax.

Elsewhere in his autumn statement, Hunt announced a new temporary windfall tax of 45pc on the "extraordinary profits" of electricity generators and said the government will launch a new Energy Efficiency Taskforce and will double its spending on energy efficiency measures.

By Jon Mainwaring