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What is the windfall tax on oil and gas companies? What is the windfall tax on oil and gas companies?
(about 7 hours later)
There have been calls for further extensions to the windfall tax on oil and gas companies operating in the North Sea after Shell reported its profits had doubled in 2022. Critics want the windfall tax on oil and gas companies operating in the North Sea to be extended after BP and Shell reported record profits for 2022.
It comes despite a levy being in place since May 2022. The Energy Profits Levy was introduced in May 2022.
What is a windfall tax?What is a windfall tax?
A windfall tax is an extra levy imposed by a government on a company.A windfall tax is an extra levy imposed by a government on a company.
The idea is to target firms which benefit from something they were not responsible for - in other words, a windfall. It targets 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 previously, initially because of rising demand after Covid restrictions were lifted, and then because because Russia's invasion of Ukraine raised energy prices. Energy firm profits have soared, initially because of rising demand after Covid restrictions were lifted, and then because because Russia's invasion of Ukraine raised energy prices.
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 much money have energy firms been making?How much money have energy firms been making?
Shell reported profits of $39.9bn (£32.2bn) in 2022, the highest in its 115-year history.Shell reported profits of $39.9bn (£32.2bn) in 2022, the highest in its 115-year history.
BP will report its 2022 results on Tuesday, 7 February. They are expected to show considerable increases as the three quarters already reported have all at least doubled. BP made profits of $27.7bn (£23bn) in the same year, up from $12.8bn in 2021.
Both companies have been increasing their dividend payments, which is the money they give directly to shareholders. Both companies have increased their dividend payments - 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 spent billions buying back their own shares from the market, in order to increase their value.
While they have benefited from high oil and gas prices, exacerbated by Russia's invasion of Ukraine, they both say they have lost a lot of money as a result of stopping investments in Russian oil firms. While they have benefited from high oil and gas prices, both firms say they have lost a lot of money as a result of stopping investments in Russian oil firms.
BP said that its UK businesses account for less than 10% of its global profits while Shell makes about 5% of its revenue in the UK.
How does the new windfall tax work?How does the new windfall tax work?
Prime Minister Rishi Sunak introduced the tax when he was chancellor, describing it as a 25% Energy Profits Levy. Prime Minister Rishi Sunak introduced the 25% Energy Profits Levy when he was chancellor.
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. In the 2022 Autumn Statement, Chancellor Jeremy Hunt announced it would increase to 35% from January 2023, and run until March 2028. It was previously due to finish at the end of 2025.
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.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.
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.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.
Mr Hunt said the tax would raise £40bn over six years.Mr Hunt said the tax would raise £40bn over six years.
The government also introduced a temporary 45% levy on what it calls "extraordinary returns" from low-carbon electricity generators in the UK.The government also introduced a temporary 45% levy on what it calls "extraordinary returns" from low-carbon electricity generators in the UK.
The Electricity Generator Levy will be paid from 1 January by larger generators. The government hopes it will raise about £14bn over six years. Larger operators started paying the Electricity Generator Levy on 1 January. The government hopes it will raise about £14bn over six years.
How much will companies pay under the levy? How much are companies paying under the levy?
Shell initially said it was not expecting to pay any of the windfall tax at all for 2022, as its investments in the North Sea meant it did not count as having made any UK profits. Shell initially said it did not expect to pay any windfall tax for 2022, as its North Sea investments meant was not considered to have made any UK profits.
But on 2 February it announced that it would actually pay $134m (£108m) for 2022 and expected to pay more than $500m (£400m) for 2023. But on 2 February it announced that it would pay $134m (£108m) for 2022, and expected to pay more than $500m (£400m) for 2023.
BP said it would pay $800m (£678m) in windfall tax for 2022. BP said it would pay $700m (£583m) in windfall tax for 2022.
However, it's not known exactly how much profit these companies are making from extracting oil and gas in the UK.
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 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 2015 to 2021 total to -£685m of tax in the UK.
BP paid more money in tax than it received back in 2021, taking its total since 2015 to -£107m. BP paid more money in tax than it received back in 2021, taking its total between 2015 and 2021 to -£107m.
Will the windfall tax affect investment in oil and gas?Will the windfall tax affect investment in oil and gas?
Shell said earlier in 2022 that it planned to spend between £20bn and £25bn on UK energy over the next 10 years. In March 2022, Shell said that it planned to spend between £20bn and £25bn on UK energy over the next 10 years.
But on 21 November, Shell's UK boss David Bunch told the Confederation of British Industry conference the company would now "have to evaluate each project on a case by case basis" because the windfall tax would mean it had "less to invest". But in November, UK boss David Bunch told the Confederation of British Industry conference that the company would now "have to evaluate each project on a case by case basis", because the windfall tax meant it had "less to invest".
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.
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.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.
In July, its UK boss Louise Kingham told a committee of MPs that the company had initially been concerned about the windfall tax being a "multi-year proposal" but that the news that it would be ending in December 2025 had been "helpful". In July, UK boss Louise Kingham told a committee of MPs that the company had initially been concerned about the windfall tax being a "multi-year proposal", but that the December 2025 deadline had been "helpful".
BP has not commented publicly since it was announced that the tax would be extended until 2028. BP has not commented publicly since the 2028 extension announcement.
TotalEnergies announced on 2 December that it would be cutting its planned investment in the North Sea by a quarter, or £100m, in 2023 as a result of the extension to the windfall tax. In December 2022, French oil company TotalEnergies said it would cut its planned 2023 investment in the North Sea by a quarter - or £100 - as a result of the extension to the windfall tax.
The French oil company is calling for there to be a mechanism by which the windfall tax would be reviewed if oil and gas prices fall below a certain level before 2028. It wants the government to agree to review the windfall tax if oil and gas prices fall below a certain level before 2028.
What's happening in the EU?What's happening in the EU?
The European Union (EU) has also decided to impose a windfall tax on energy companies, with a 33% levy on fossil fuel firms' profits and also one on the revenues made from rising electricity costs. The European Union (EU) has also imposed a windfall tax on energy companies, with a 33% levy on fossil fuel firms' profits, and another on the revenues made from rising electricity costs.
EU ministers estimate that they can raise €140bn (£123bn) from the levies.EU ministers estimate that they can raise €140bn (£123bn) from the levies.
The US energy company ExxonMobil is suing the EU to try to stop them.The US energy company ExxonMobil is suing the EU to try to stop them.
EU agrees windfall tax on energy firms
Energy giant ExxonMobil sues EU to block energy windfall tax