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  • Writer's pictureSara White

Oil and gas windfall tax could be scrapped

Updated: Mar 21

The energy profits levy, which puts a marginal tax rate of 75% on North Sea oil and gas production, will remain in place for the next five years unless prices drop.

Sara White, Editor, Accountancy Daily

The 75% rate will be charged until 2028 while oil and gas prices remain higher than historic norms. But the tax rate will be reduced to 40% if prices consistently return to normal levels for a sustained period, the government has confirmed.

It has set floor prices which would see the removal of the windfall tax. The tax rate for oil and gas companies will only return to 40% if both average oil and gas prices fall to, or below, $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters.

The energy profits levy has raised around £2.8bn to date, covering just under half government support for typical household energy bills last winter. The tax is expected to raise almost £26bn by March 2028.

The windfall tax takes the total revenues from taxes on oil and gas companies to £50bn over the next five years.

While the levy included an investment allowance with tax breaks to encourage oil and gas giants to continue to invest in oil and gas extraction in the UK, the industry has warned that companies are cutting back on investment.

The government said this put the long-term future of the UK’s domestic supply at risk.

As a result, the government has announced an energy security investment mechanism to give the oil and gas sector certainty to raise capital and invest in new and existing projects, securing affordable and reliable domestic energy supply and protecting some of the 215,000 British jobs the sector supports.

It will mean that if prices fall to historically normal levels for a sustained period the tax rate for oil and gas companies will return to 40%, the rate before the energy profits levy was introduced. Based on the independent Office for Budget Responsibility’s (OBR) forecast the energy security investment mechanism will not be triggered before the tax’s planned end date in March 2028.

Gareth Davies MP, Exchequer secretary to the Treasury, said: ‘It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we have helped save the typical household over £1,300 on their energy bill last winter.’

John O’Connell, chief executive of the TaxPayers’ Alliance, said: ‘Scaling back the windfall tax shows the government recognises the harm it is doing to investment.

‘But rather than admit to its mistake, the Treasury is bolting on yet another complication in an attempt to limit the damage.’

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