Chancellor of the Exchequer Jeremy Hunt is considering limiting the windfall tax on the profits of UK oil and gas companies to allay industry concerns.
Under the proposals being considered by the Treasury, the additional 35% levy would cease to apply if energy prices fall below a given level, according to a person familiar with the matter who requested anonymity discussing plans that aren’t finalized. Without a price floor, energy firms are due to pay the extra tax through to 2028 even if prices drop back in line with longer-term trends.
The policy isn’t likely to be included in Hunt’s annual budget on Wednesday, the person said. Their verdict was backed up by a senior official, who suggested it could yet be introduced at a future fiscal event. The next opportunity is likely to be a statement from the chancellor in the fall. The Treasury declined to comment.
That the Treasury is now considering softening the tax illustrates the desire in government to spur investment and grow the economy, as well as make it less dependent on foreign imports of oil and gas. But it would be a politically tricky move, with Shell Plc and BP Plc recently posting record profits and the opposition Labour Party calling for the levy to be strengthened.
The UK’s oil and gas sector has been calling for the windfall tax to be scrapped when energy prices fall back to “normal levels,” saying the 35% levy is deterring investment.
Prime Minister Rishi Sunak brought in the windfall tax on energy profits in May last year in response to soaring prices exacerbated by Russia’s war in Ukraine. Hunt increased the levy to 35% from 25% in November as he sought to subsidize household energy bills and repair Britain’s public finances following the chaotic premiership of Liz Truss.
“This tax is a potential slow disaster for the UK,” Deirdre Michie, chief executive of Offshore Energies UK, the main industry lobby group, said in December. “If investment falls now, then in a few years time our gas and oil production will plummet and we will become ever more reliant on imports.”
OEUK hasn’t defined what it considers to be a “normal” price. Brent crude, the North Sea benchmark, averaged around $65 to $70 a barrel in 2018, 2019 and 2021, compared with $80 currently. UK natural gas averaged about 40 (49 cents) pence a therm from 2018 to 2020 — prior to Russia’s export squeeze — compared with roughly 120 pence currently.