Windfall tax to be suspended if energy prices drop
The government has said it will suspend the windfall tax on oil and gas companies if prices return to normal levels for an extended period. By halting the windfall tax, the overall tax rate on energy firms would decrease from 75% to 40%.
A windfall tax is designed to target companies that benefit from factors they are not responsible for. It was initially introduced last year to support a scheme aimed at reducing energy costs for households and businesses.
Profits of energy companies have experienced a significant surge recently, initially due to increased demand following the lifting of Covid restrictions, and later due to elevated energy prices resulting from Russia’s invasion of Ukraine. However, oil and gas prices have now started to decrease from their peak levels.
According to the Treasury, the windfall tax will remain in effect until March 2028, but the tax rate will be reduced if the average prices of oil and gas fall to or below specified levels for two consecutive three-month periods. The set levels are $71.40 per barrel for oil and £0.54 per therm for gas. As of Friday morning, Brent crude oil was trading at $75 per barrel, with gas prices around £0.62.
Energy companies have been urging the government to reduce the windfall tax, expressing concerns that it hampers investment. The Treasury stated that its decision was influenced by these warnings, emphasizing that any decline in investment would jeopardize the long-term domestic energy supply in the UK, potentially leading to increased reliance on imports.
Oil and gas companies operating in the North Sea currently pay 30% corporation tax on their profits, with an additional 10% supplementary rate. The windfall tax, also known as the Energy Profits Levy, stands at 35%, resulting in an overall tax rate of 75% for oil and gas companies. The elimination of the windfall tax would bring the overall tax rate back to 40%.
