UK Introduces New 25% Tax on Oil-And-Gas Companies -- Update

By Jaime Llinares Taboada

The U.K. treasury chief on Thursday outlined a new 25% tax on the profits of oil-and-gas companies, raising the overall fiscal burden on the industry to 65%.

Rishi Sunak told the House of Commons this is a temporary levy that will raise around 5 billion pounds ($6.29 billion) over the first 12 months, and will be used to fund subsidies for households. The new tax is effective Thursday and will be legislated for via a standalone bill.

The oil-and-gas industry is making extraordinary profits because of rising commodity prices, and the tax will be phased out when oil-and-gas prices return to historically normal levels, Mr. Sunak said.

The levy doesn't apply to the electricity generation sector, but the Chancellor confirmed that the treasury will "urgently evaluate the scale of these extraordinary profits" for power companies.

Currently, oil-and-gas producers pay a 40% headline rate tax, consisting of a 30% Ring Fence Corporation Tax and a 10% Supplementary Charge.

In addition, the Chancellor said the government is raising investment allowances so that, for every pound invested, companies get back a 90% tax relief.

Earlier this week, oil-and-gas industry lobby Offshore Energies UK said a one-off windfall tax wouldn't sustainably help consumers and would reduce investor confidence in the U.K.

Greenpeace UK said Thursday that the 25% windfall tax is too low and a missed opportunity. "Instead of driving money into clean energy solutions, [Mr.] Sunak has used this announcement to encourage oil and gas company investments," Greenpeace political campaigner Ami McCarthy said.

As the global economy recovered from the coronavirus pandemic, prices for energy commodities have risen in the U.K. and elsewhere. This was later exacerbated by the war in Ukraine. A barrel of oil in Europe currently costs $114, up from $69 a year ago and $36 two years earlier.

The increase in the price of natural gas has been even higher, and this commodity is directly correlated with the wholesale electricity market. This week British energy regulator Ofgem warned that the annual price cap for energy bills would rise to around GBP2,800 in October. This compares with GBP1,277 last winter and GBP1,042 in the same 2020-21 period.

Higher energy prices have been boosting earnings for oil-and-gas companies since last year. Shell PLC reported an adjusted profit of $19.3 billion in 2021 and BP PLC made $12.8 billion, with both figures being the highest since 2018. Analysts are forecasting their profits will rise further this year.

Write to Jaime Llinares Taboada at [e-mail]; @JaimeLlinaresT

(END) Dow Jones Newswires

May 26, 2022 09:10 ET (13:10 GMT)

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