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Oct 23, 2024

What is the windfall tax on oil and gas companies and how much do they pay? - BBC News

Image source, Getty Images The windfall tax on oil and gas companies will increase in November, and will remain in place until March 2030. The levy was introduced as a response to soaring energy

Image source, Getty Images

The windfall tax on oil and gas companies will increase in November, and will remain in place until March 2030.

The levy was introduced as a response to soaring energy company profits, and was designed to help fund a scheme to limit household gas and electricity bills.

However, firms in the sector have warned that the increase will hit jobs and investment.

A windfall tax is a levy imposed on companies that have benefited from something they were not responsible for - in other words, a windfall.

Global oil and gas prices started to rise in late 2020 as demand increased with the lifting of Covid restrictions, but they soared in 2022 following Russia's invasion of Ukraine.

The increase in prices led to bumper profits for energy companies, leading to calls for a windfall tax.

The Energy Profits Levy - the formal name for the windfall tax - was introduced in May 2022 by the then Chancellor, Rishi Sunak.

The government said the money raised would fund support for households facing rising energy bills.

The levy applies to profits made from extracting UK oil and gas. It was initially set at 25% and was due to expire at the end of 2025.

In January 2023 the then Chancellor Jeremy Hunt increased the levy to 35%.

In the spring 2024 Budget, Hunt announced it would remain in place until March 2029 because the continuing war in Ukraine was extending energy firms' windfall profits.

The new Labour government said it would increase the levy to 38% on 1 November.

The tax will remain in place until 31 March 2030, unless - as originally set out by the previous government - oil and gas prices drop below a certain level for six months.

A separate levy was also brought in on "extraordinary returns" from low-carbon electricity generating firms in the UK.

Larger operators started paying the Electricity Generator Levy on 1 January 2023. It was hoped this would raise about £14bn over six years.

Among the UK energy giants, BP reported a record profit of $27.7bn in 2022. While this fell to $13.8bn in 2023, it was still the firm's second highest annual profit in a decade.

Shell's profits of $39.9bn in 2022 were the highest in its 115-year history. Its 2023 profits were $28.2bn.

BP says its UK businesses account for less than 10% of global profits, while Shell makes about 5% of its revenue in the UK.

Image source, Getty Images

In the financial year 2022-2023, the first year of its operation, the levy raised £2.6bn. In the following 12-month period it raised £3.6bn.

BP said its North Sea business paid $2.2bn in UK tax for its North Sea operations in 2022, of which $700m was due to the levy.

In 2023 it paid $1.5bn (£1.2bn), including $720m under the levy.

Shell said it paid £178m in UK windfall tax for 2022.

In 2023, it paid £1.1bn in overall tax in the UK, £240m of which was a result of the levy.

Oil and gas firms operating in the North Sea are taxed differently to other companies.

They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. In contrast, other firms with profits over £250,000 a year pay 25% corporation tax.

When the windfall tax is added, it means the overall tax rate faced by oil and gas companies operating in the UK is 75%, rising to 78% in November.

However, oil and gas firms have been able to reduce the amount of UK tax they pay by factoring in losses or spending on things like decommissioning North Sea oil platforms.

BP and Shell both received more money back from the UK government than they paid in tax every year from 2015 to 2020 (except Shell in 2017).

Energy firms have also been able to reduce the amount of windfall tax they pay through certain investment allowances.

However, the government has said it will remove some of these allowances from 1 November.

Further details on the changes to the windfall levy will be set out in the Budget on 30 October.

The industry body Offshore Energies UK (OEUK) said the proposed changes to the windfall tax will sharply reduce investment in the sector, putting thousands of jobs at risk.

OEUK says the expected tax paid by oil and gas producers would "increase in the very short term" by £2bn, and would later result in a £12bn loss.

In August, 42 companies wrote to the government to express their "grave concern" over the changes.

The Treasury said the government was committed to a "constructive dialogue" with the oil and gas industry about the levy.

But it also said it wanted North Sea oil and gas producers "to contribute their fair share towards our energy transition" away from fossil fuels.