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What is the windfall tax on oil and gas companies? What is the windfall tax on oil and gas companies?
(17 days later)
There have been calls to increase taxes on energy companies, after Shell and BP reported huge three-month profits. The government is extending the windfall tax on oil and gas companies operating in the North Sea.
A windfall tax on the UK oil and gas sector was introduced in May. The levy was introduced in May, but will now carry on for longer at a higher rate.
How much have energy firms been making? There had been calls to increase the tax after Shell and BP reported huge profits.
BP made $8.2bn (£7.1bn) worldwide between July and September, which was more than double its profit for the same period last year. It had made £6.9bn in the three months to June. How much money have energy firms been making?
Shell announced worldwide profits of £8.2bn and £9bn for the same periods. BP made $8.2bn (£7.1bn) worldwide between July and September, which was more than double its profit for the same period in 2021. It had made £6.9bn in the three months to June.
Shell announced worldwide profits of £8.2bn and £9bn for the same three-month periods.
Both companies have increased their dividend payments, which is the money they give directly to shareholders.Both companies have increased their dividend payments, which is the money they give directly to shareholders.
And they have been spending billions buying back their own shares from the market, in order to increase their value.And they have been spending billions buying back their own shares from the market, in order to increase their value.
Shell and BP's profits have been boosted by high oil and gas prices, exacerbated by Russia's invasion of Ukraine, although both companies say they have written off a lot of money as a result of exiting from investments in Russian oil firms. Shell and BP's profits have been boosted by high oil and gas prices, exacerbated by Russia's invasion of Ukraine. However, both companies say they have lost a lot of money as a result of stopping investments in Russian oil firms.
BP sees huge profit due to high oil and gas prices
Shell pays no UK windfall tax despite profits jump
What is a windfall tax?What is a windfall tax?
A windfall tax is a tax imposed by a government on a company. A windfall tax is a extra levy imposed by a government on a company.
The idea is to target firms lucky enough to benefit from something they were not responsible for - in other words, a windfall. The idea is to target firms which benefit from something they were not responsible for - in other words, a windfall.
Energy firms are getting much more money for their oil and gas than they were last year.Energy firms are getting much more money for their oil and gas than they were last year.
This is because demand increased when Covid restrictions were lifted and supply concerns grew following the Ukraine war. This is because demand increased when Covid restrictions were lifted. and the Ukraine war led to concerns about energy supply.
How high could my energy bills go?How high could my energy bills go?
Which countries are doing the most to tackle energy bills?Which countries are doing the most to tackle energy bills?
How does the new windfall tax work?How does the new windfall tax work?
Rishi Sunak introduced the tax when he was chancellor, describing it as a 25% Energy Profits Levy.Rishi Sunak introduced the tax when he was chancellor, describing it as a 25% Energy Profits Levy.
It applies to profits made from extracting UK oil and gas, but not from other activities such as refining oil and selling petrol and diesel on forecourts. In the Autumn Statement, Chancellor Jeremy Hunt announced this would increase to 35% from January 2023, and stay in place until March 2028. It had previously been scheduled to finish at the end of 2025.
The tax also allows the firms to apply for tax savings worth 91p of every £1 invested in fossil fuel extraction in the UK. When the BBC asked the government how much the tax break would cost it received no reply. The levy applies to profits made from extracting UK oil and gas, but not from other activities such as refining oil and selling petrol and diesel on forecourts.
Shell has said it is not expecting to pay any of the windfall tax at all this year, as its investments in the North Sea meant it did not count as having made any UK profits. It does expect to pay some in 2023. Labour criticised the scheme because it also lets firms claim tax savings worth 91p of every £1 invested in fossil fuel extraction in the UK. That allowance will continue.
BP said it would pay $800m in windfall tax this year. Mr Hunt said the tax will raise £40bn over six years.
We don't know exactly how much profit these companies are making from extracting oil and gas in the UK. The government has also introduced a temporary 45% levy on what it calls "extraordinary returns" from low-carbon electricity generators in the UK.
The Treasury says it expects the tax to raise £5bn in its first year, but that may be optimistic if Shell is not contributing until 2023. The Electricity Generator Levy will be paid from 1 January by larger generators. The government hopes it will raise about £14bn over six years.
The windfall tax does not apply to companies that generate electricity from sources such as nuclear or wind power. They have also been making higher profits as the price of this electricity is linked to gas prices. How much will companies pay under the levy?
However, they may have their earnings capped under a new government plan. Shell has said it is not expecting to pay any of the windfall tax at all this year, as its investments in the North Sea meant it did not count as having made any UK profits.
Government plans cap on renewable energy revenues It does expect to pay some in 2023.
What have politicians said? BP said it would pay $800m (£678m) in windfall tax this year.
Asked if the government should raise the windfall tax on firms, government minister Nadhim Zahawi said energy giants pay "double the corporation tax" of other businesses, as well as the windfall tax. However, we don't know exactly how much profit these companies are making from extracting oil and gas in the UK.
He added that the existing levy was introduced in a "very smart way" because it incentivised investment.
Ed Miliband, Labour's shadow climate change secretary, said Shell's profits were "further proof" the UK needed a higher windfall tax.
Labour has said it would extend the tax and would apply it to profits from January 2022. It would also get rid of the tax relief scheme.
The Liberal Democrats want the tax back-dated to the last three months of 2021.
The IPPR think-tank has called on the government to tax share buybacks, as has been announced in the US, to raise extra funds to support households.
How much tax do oil companies usually pay?How much tax do oil companies usually pay?
Oil and gas firms operating in the North Sea are taxed differently to other firms.Oil and gas firms operating in the North Sea are taxed differently to other firms.
Taxes on their profits are higher - they pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other firms currently pay corporation tax at 19%.Taxes on their profits are higher - they pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other firms currently pay corporation tax at 19%.
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.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.
In recent years, such methods have meant that BP and Shell, for example, have paid almost no tax in the UK.In recent years, such methods have meant that BP and Shell, for example, have paid almost no tax in the UK.
BP and Shell both received more money back from the UK government than they paid every year from 2015 to 2020 (except 2017, when Shell paid more than it received).BP and Shell both received more money back from the UK government than they paid every year from 2015 to 2020 (except 2017, when Shell paid more than it received).
Shell also paid a negative amount of tax in 2021, taking its total since 2015 to -£685m of tax in the UK.Shell also paid a negative amount of tax in 2021, taking its total since 2015 to -£685m of tax in the UK.
BP paid more than it received in 2021, taking its total since 2015 to -£107m.BP paid more than it received in 2021, taking its total since 2015 to -£107m.
Will the windfall tax affect investment? Will the windfall tax affect investment in oil and gas?
BP plans to spend a maximum of £18bn on the UK's energy system by the end of 2030.BP plans to spend a maximum of £18bn on the UK's energy system by the end of 2030.
Chief executive Bernard Looney was asked by The Times on 3 May which of BP's planned UK investments would not go ahead if there were a windfall tax. In May 2022, BP chief executive Bernard Looney told the Times newspaper that all of the company's planned UK investments would carry on regardless of any windfall tax.
Mr Looney replied: "There are none that we wouldn't do."Mr Looney replied: "There are none that we wouldn't do."
Shell plans to spend £20bn-£25bn on UK energy over the next 10 years. Shell plans to spend between £20bn and £25bn on UK energy over the next 10 years.