The government's windfall tax on oil and gas companies raised £2.6bn in its first year.

The Energy Profits Levy was introduced as a response to soaring profits in May 2022.

What is a windfall tax?

A windfall tax is a levy imposed by a government on companies that have benefited from something they were not responsible for - in other words, a windfall.

Energy firm profits soared because of rising demand after Covid restrictions were lifted, and then because Russia's invasion of Ukraine raised energy prices.

The windfall tax applies to profits made from extracting UK oil and gas.

How much money have energy firms been making?

BP reported profits of $2.5bn (£2bn) between April and June (down from $8.4bn in the same period last year). For the whole of 2022, it made $27.2bn (£21.8bn).

Shell reported profits of $5.1bn (£4.1bn) between April and June, (less than half the amount it made in the same period last year). For the whole of 2022 it made profits of $39.9bn (£32.2bn) - the highest in its 115-year history.

BP says its UK businesses account for less than 10% of global profits, while Shell makes about 5% of its revenue in the UK.

British Gas owner Centrica made £3.3bn for 2022, more than triple the £948m total for 2021.

How does the new windfall tax work?

Prime Minister Rishi Sunak introduced the 25% Energy Profits Levy (EPL) in May 2022 when he was chancellor.

The current chancellor, Jeremy Hunt, increased it to 35% from January 2023, and announced it will run until March 2028.

However, in June the government said windfall tax would end if oil and gas prices fall below a certain level for six months.

For that to happen, average oil prices must fall to, or be below, $71.40 per barrel, and £0.54 per therm for gas, for two consecutive quarters.

In last year's Autumn Statement, the government also introduced a temporary 45% levy on what it calls "extraordinary returns" from low-carbon electricity generators in the UK.

Larger operators started paying the Electricity Generator Levy on 1 January. The government hopes it will raise about £14bn over six years.

How much windfall tax are companies paying?

In the first tax year the windfall tax was in place 2022-2023, HMRC received £2.6bn from the levy. It had been forecast to bring in £5bn in the first year.

In the first six months of 2023, BP paid $970m (£755m) of tax in the UK - with about $460m (£358m) due to the EPL.

In February 2023, Shell announced that it would pay $134m (£108m) for 2022, and expected to pay more than $500m (£400m) for 2023.

Centrica said it was paying about £1bn in tax from its £3.3bn 2022 profits, which includes about £54m under the levy.

How much tax do oil companies usually pay?

Oil and gas firms operating in the North Sea are taxed differently.

They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other firms with profits over £250,000 a year currently pay 25% corporation tax.

But oil and gas firms have been able to reduce the amount of tax they pay by factoring in losses or spending on things like decommissioning North Sea oil platforms.

As a result BP and Shell have paid almost no UK tax in recent years

Both firms received more money back from the UK government than they paid every year from 2015 to 2020 (except Shell in 2017).

Shell also paid a negative amount of tax in 2021, taking its 2015 to 2021 UK tax total to -£685m.

In January 2023, Shell announced that it would pay UK tax for the first time since 2017.

BP paid more money in tax than it received back in 2021, taking its total for the same period to -£107m.

Will the windfall tax affect investment in oil and gas?

Companies are offered big tax benefits if they invest in oil and gas extraction. For every £100 they invest they can claim back £91.40 in tax relief.

And if they spend £100 decarbonising the way they extract oil and gas they can claim up to £109.25 in tax benefits.

But Gilad Myerson from Ithaca Energy, a company developing the Rosebank oilfield, told BBC News "we have slowed down our investment programme quite significantly because of the instability" caused by the windfall tax.

The £3.1bn investment in Rosebank will qualify the companies involved for up to £2.9bn in tax relief.

In November 2022, Shell said it would "have to evaluate each project on a case-by-case basis", having previously planned to invest up to £25bn over the next decade.

BP plans to spend up to £18bn on the UK's energy system by 2030 and said in May 2022 that all planned UK investments would continue.

But in December 2022, French oil company TotalEnergies said it would cut its planned 2023 North Sea investment by a quarter - £100m - because of the extension to the windfall tax.

Source:
courtesy of BBC NEWS

by BBC NEWS

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