Tax Increases Could Damage UK Energy Sector Growth

Raising the windfall tax on the UK’s oil and gas companies could damage economic growth and jeopardise jobs, the industry has warned.

Offshore Energies UK (OEUK) has expressed concerns that the proposed tax increase will significantly reduce investment in the sector, potentially resulting in a £13 billion loss to the UK economy between 2025 and 2029, and putting 35,000 jobs at risk.

The warning coincides with concerns from a leading business organisation that discussions around tax rises and employment rights have “dented confidence in the business environment” in the UK.

A Treasury spokesperson responded, stating that the government remains committed to maintaining a “constructive dialogue” with the industry regarding potential tax changes.

According to current government plans, the Energy Profits Levy (EPL) – the formal term for the windfall tax – is set to increase from 35% to 38% on 1 November for profits made by oil and gas companies operating in the UK.

Firms in the North Sea are already subject to a different tax regime, paying 30% corporation tax on profits, in addition to a supplementary 10% rate. From November, the overall tax rate on profits for energy companies is anticipated to rise to 78%.

The government has also announced intentions to extend the levy until 2030 and “tighten” investment allowances, which have enabled companies to reduce their tax liability if they invest in projects like green energy initiatives in the North Sea.

OEUK has argued that these policy changes will “undermine” the industry’s capacity to “support the government’s overarching goal of driving economic growth.”

Their analysis echoes earlier concerns from businesses regarding the Labour government’s plan to increase the windfall tax on energy company profits.

Key findings from the industry body’s analysis include:

• An initial £2 billion increase in expected tax revenue from oil and gas producers in the very short term, followed by a £12 billion loss in tax receipts.
• A “rapid decline” in investment, dropping from £14 billion under the current tax policy to £2 billion by 2029.
• The potential loss of around 35,000 jobs in 2029 alone due to halted projects.

“This is a government that has made economic growth its main priority, yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy,” said David Whitehouse, OEUK’s chief executive.

Last week, Prime Minister Sir Keir Starmer cautioned that the upcoming autumn Budget, scheduled for October, where the government will outline its taxation and spending plans, is expected to be “painful.”

Talk of tax increases and employment rights has “dented confidence in the environment for business in the UK,” remarked Anna Leach, chief economist at the Institute of Directors.

The Institute reported that business leader confidence plummeted in August, with investment intentions for the year ahead experiencing the sharpest decline since the onset of the Covid pandemic lockdowns. Additionally, revenue and headcount expectations among business leaders also fell last month.

“We are urging the government to take the time to get policy design right for the long term and to deliver the stable tax and policy framework needed to boost business confidence and investment,” Ms Leach added.

‘Time is running out’ Mr Whitehouse highlighted that, for more than two years, UK oil and gas companies have been paying “three times” the rate of corporation tax compared to any other sector.

“Time is running out to mitigate damage that has already been done and to prevent further escalation,” he said. “The Prime Minister promised to manage the North Sea in a way that does not jeopardise jobs. We now need an honest conversation about how we can achieve this and require the government to work with the sector urgently.”

The Energy Profits Levy was first introduced by former Prime Minister Rishi Sunak in May 2022. Oil and gas prices began to climb following the end of Covid lockdowns and surged after Russia’s invasion of Ukraine, leading to record profits for energy companies.

With households facing soaring energy bills, the government faced pressure to act. It introduced the windfall tax to help fund a scheme to cap gas and electricity bills, which has since ended.

Energy prices have since decreased from their 2022 peaks but remain elevated. The typical annual household energy bill is set to rise by 10% from October.

OEUK pointed out that the original EPL was intended as a “temporary tax in response to the economic environment at the time.”

“These unprecedented oil and gas prices have since returned to align with long-term real averages, and the windfall conditions that the EPL was designed to address have passed,” it said.

A Treasury spokesperson stated: “We are committed to maintaining a constructive dialogue with the oil and gas sector to finalise changes to strengthen the windfall tax, ensuring a phased and responsible transition for the North Sea.

“Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future.”