The energy windfall tax hokey cokey

With the forthcoming Autumn Statement fast approaching on 17 November, an extended or higher energy windfall tax is expected to make an appearance. It is understood that forecast tax rises will be across the board, but the prime minister and the chancellor have agreed that the greatest burden should be borne by those with the “broadest shoulders”. 

With their record profits, the oil and gas majors seem to be an obvious area of focus for large tax hikes and, coupled with the heat or eat Hobson’s choice that many households are facing in the UK, it will garner public support as well. Whilst it is the government’s view that a windfall tax on oil and gas companies will raise an estimated £40bn over five years, it is hard to see how this is the case when the majority of the profits of such oil majors are made overseas and therefore outside the UK tax net. This might turn out to be more of a vote winner than a genuine revenue generator.

The energy windfall tax was introduced by Sunak when he was in the role of chancellor, so he is clearly a supporter. The public, and even the opposition, are in favour given the record profits of the oil majors whilst many households are living in fuel poverty. That said, do the claims of revenue generation from this new tax stand up to scrutiny? The government wish to maximise revenues from the windfall tax and so may increase the rate from the current 25% to 30%, extending the policy until 2028 and including electricity generators. Depending on how widely the windfall tax net is drawn, this could have a detrimental impact on the country’s continued investment in renewables projects. A big, and unexpected, tax on profits for new infrastructure investment will change the project economics and could mean a diversion of funds from the UK or from the renewables sector.

Turning to the claims of revenue generation, it is difficult to understand how the £40bn is derived. Does it take into account the decrease in tax on dividend receipts as a result of reduced distributable profits, if indeed the windfall tax does result in any meaningful revenues? Does it make any assumptions about the possibility of the oil majors moving their offices overseas and the resultant loss of income tax and national insurance and the associated cost of funding an increased number of the unemployed? What would be the cost of policing the new tax? Italy recently introduced a 25% windfall tax on energy company profits with limited success as the companies refused to pay it and brought legal cases against the government. 

Even if those concerns do not come to fruition, here is the absolute showstopper… 30% of nothing is nothing. Whilst these oil majors are reporting record profits they do not report where those profits are accruing. Any windfall tax would only fall due on the profits made on UK oil and gas extraction (and possibly electricity generation). Shell, for example, has paid no taxes on its UK oil and gas production since 2017 and it is hard to extrapolate how a new windfall tax will boost the UK tax burden for Shell. BP on the other hand has said it expects to pay just under £700m under the current levy. Harbour Energy, which is the UK’s largest producer, has confirmed it expects its tax burden under the windfall tax to be £350m. These may be substantial amounts, but it is only about 12.5% of the expected annual tax take from the new tax and these three producers together comprise about 50% of the UK oil production. 

It begs the question, where is the rest of the £8bn per annum coming from? Is the £40bn a robust number or is it a glass half full approach ignoring any knock-on effect of loss of other tax revenues and over stating the profits to which the tax can be applied? It is not clear how this new tax will meet the £40bn revenue generation over the next five years as the sums do not add up, but this may become apparent as the full remit of the tax is unveiled later this month.