UK imposes exceptional tax on oil and gas producers

The UK government has announced it will introduce a windfall tax on oil and gas operators as it strives to ease the country’s cost of living crisis.

The announcement comes amid challenges posed by high inflation – the highest rate seen in the UK in 40 years – and the pressures of soaring energy bills on households across the country.

A windfall tax is a one-time tax imposed by a government on a company, targeting those who benefit from something for which they were not responsible; in this case, the huge profits made by oil and gas companies due to a sharp increase in oil and gas prices following Russia’s invasion of Ukraine. The goal is to distribute excess profits in an area for the greater social good.

Chancellor of the Exchequer of the United Kingdom, Rishi Sunakannounced on Thursday that the government was introducing a temporary and targeted measure Tax on energy profits on the profits of oil and gas companies at the rate of 25%.

“We are also incorporating a new investment allowance which doubles the relief for energy companies that invest their profits in the UK,” Sunak said.

Speaking about the inflation challenge facing the country, Sunak said during his address to the British Parliament: “We will turn difficulty into a springboard for economic renewal and growth.”

He added: “It may take time, but we have the tools we need and the determination it will take to bring inflation down.” Sunak then listed the three specific tools available to fight inflation, independent monetary policy, fiscal responsibility and supply side activism.

The exceptional tax decision comes as oil and gas giants, such as Shell and BP, posted record profits in the first quarter of this year, driven by a spike in oil and gas prices. BP has also revealed it will invest up to £18bn in Britain’s energy system by the end of 2030.

Declaring that the the oil and gas sector is making extraordinary profits not as a result of recent changes in risk-taking, innovation or efficiency, but as a result of soaring global commodity prices caused in part by the war in Russia, the Chancellor said: “For this reason, I support the argument of taxing these profits fairly.”

He further added: “But as always, there is a reasonable middle ground. We don’t have to be ideological about it, we have to be pragmatic. It is possible both to tax windfall profits fairly and to encourage investment.

Therefore, Sunak said: “We are going to introduce a temporary tax targeted at energy profits. But we have incorporated a new investment allocation into the new levy.

He explained that this means companies will have a new and important incentive to reinvest their profits, emphasizing that this is a temporary measure and, when will oil and gas prices return at more historically normal levels, the the tax will be phased out with a sunset clause enshrined in law.

“Basically, with our new investment allocation, we are almost double overall investment relief for oil and gas companies. For every pound a company invests, it recoups 90% tax relief. Thus, the more a company invests, the less it will pay in taxes. added the Chancellor.

Oil and gas industry thinks windfall tax will deter investors

Previously the UK trade organization Offshore Energies UK, which now also includes low-carbon offshore energy technologies, warned that exceptional fiscal risks reduce energy security, increase prices for consumers – and cause long-term damage to the UK’s offshore energy industry.

OEUK has warned that the tax will deter investors and destabilize the industry in the short term – just when the global energy crisis makes stability vital. In the long term, he warns, a windfall tax will also make it much harder for the UK to meet its target of net zero greenhouse gas emissions by 2050.

Deirdre MichieCEO of OEUK, said earlier this week: “The reality is that we are already the highest taxed industry in the UK. UK oil and gas operators pay 40% tax on their offshore profits.

As previously reported, the Office for Budget Responsibility has predicted that UK operators will pay over £7.8bn to the Exchequer this financial year.

“The UK offshore industry needs a stable and predictable regime. A windfall tax may not affect projects already underway, but is likely to discourage planned investments, for which funds have not yet been committed. “The result would be lower oil and gas production for years to come – just when the UK needs reliable sources of energy the most,” Michie concluded.

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