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Chancellor announces energy profits levy

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In a statement to the House of Commons on 26 May 2022, the Chancellor of the Exchequer outlined the following new measures which aim to address the most serious impacts of the cost of living crisis:

  • a new temporary energy profits levy, charged on oil and gas company profits at a rate of 25%; and
  • a new 80% investment allowance to incentivise investment in energy production.

The new levy is an additional tax on UK oil and gas profits on top of the existing 40% headline rate of tax (30% main ring-fence corporation tax rate plus 10% supplementary charge), taking the combined rate of tax on profits to 65%. Companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy, although carry-back and carry-forward of levy losses will be available.

The levy takes effect from 26 May 2022 and legislation will be introduced shortly. The UK government expects the levy to raise £5bn over 12 months, although it will be phased out when oil and gas prices return to ‘historically more normal levels’ or by 31 December 2025 at the latest (via a sunset clause in the legislation). The investment allowance will provide an ‘immediate incentive for the oil and gas sector to invest in UK extraction’ with relief at the point of investment.

The Treasury’s Energy profits levy factsheet sets out how, for every £1 invested, companies will receive 91p relief.

The energy profits levy will not apply to the electricity generation sector, where extraordinary profits are also being realised as a result of the effect of rising gas prices on the energy market as a whole. The government will therefore, in the longer term, pursue energy market reforms to ensure the market price for energy reflects the cost of producing that energy.

Funds raised from the levy will be used to target support for those most deeply impacted by the cost of living crisis, with a payment of £650 made to 8 million households in receipt of means-tested benefits, £300 paid to pensioners who receive the winter fuel allowance, and an additional £150 for those receiving disability benefits.

Limited support will also be available universally (regardless of income), with the previously announced October energy bill ‘rebate’ of £200 instead being doubled to £400 and with the requirement to repay scrapped. This means households will receive a £400 reduction in their energy bills from October 2022.

The chancellor also announced that, in 2023, benefits will be uprated by September 2022 CPI.

Robert Pullen, Partner at Blick Rothenberg pointed out that the package of measures will bring welcome relief to many but, with ‘spiralling inflation and costs being incurred now, with more to come in the Autumn, calls demanding more help for the squeezed middle, particularly workers who are being hit hard by increasing costs and the higher national insurance contributions, are likely to continue. Whether Rishi will announce further support, or changes to the tax system more widely such as a speculated reduction in the income tax rate or increases to the long frozen basic rate band (which is being severely eroded by inflation), remains to be seen.’

Heather Self, Partner at the firm commented: ‘Overall, this is a generous package of measures, which will provide real help to many of those in most need. But yet again, we see a Chancellor introducing further significant measures, just weeks after his Spring Statement. He does need to develop a strategy rather than just keep responding to the latest crisis.’

Commenting on the windfall tax from the perspective of investors, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown noted that, although the levy may affect returns of capital in the short term, the new investment allowance will likely see accelerated investment by BP and Shell, ‘a strategy which will be welcomed by many investors who see environmental progress and not just shareholder pay-outs as crucial for their long term growth prospects’.

Issue: 1578
Categories: News
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