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What is the windfall tax on oil and gas companies and how much do they pay? What is the windfall tax on oil and gas companies and how much do they pay?
(about 1 month later)
The windfall tax on oil and gas companies has been extended by a year - until March 2029 - Chancellor Jeremy Hunt announced in the Budget. The windfall tax on oil and gas companies will increase in November, and will remain in place until March 2030.
The Energy Profits Levy, introduced as a response to soaring profits in May 2022, raised £2.6bn, external in its first year. The levy was introduced as a response to soaring energy company profits, and was designed to help fund a scheme to limit household gas and electricity bills.
However, firms in the sector have warned that the increase will hit jobs and investment.
What is a windfall tax?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. A windfall tax is a levy imposed 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. Global oil and gas prices started to rise in late 2020 as demand increased with the lifting of Covid restrictions, but they soared in 2022 following Russia's invasion of Ukraine.
The windfall tax applies to profits made from extracting UK oil and gas. The increase in prices led to bumper profits for energy companies, leading to calls for a windfall tax.
How much money have energy firms been making? How does the windfall tax on oil and gas companies work?
BP made $13.8bn (£11bn) in 2023, down from the record $27.7bn in 2022. The Energy Profits Levy - the formal name for the windfall tax - was introduced in May 2022 by the then Chancellor, Rishi Sunak, external.
Shell profits were $28.2bn (£22.3bn) in 2023, down from $39.9bn in 2022 - the highest earnings in its 115-year history. The government said the money raised would fund support for households facing rising energy bills.
The levy applies to profits made from extracting UK oil and gas. It was initially set at 25% and was due to expire at the end of 2025.
In January 2023 the then Chancellor Jeremy Hunt increased the levy to 35%.
In the spring 2024 Budget, Hunt announced it would remain in place until March 2029 because the continuing war in Ukraine was extending energy firms' windfall profits.
The new Labour government said it would increase the levy to 38% on 1 November, external.
The tax will remain in place until 31 March 2030, unless - as originally set out by the previous government - oil and gas prices drop below a certain level for six months.
A separate levy was also brought in on "extraordinary returns" from low-carbon electricity generating firms in the UK.
Larger operators started paying the Electricity Generator Levy, external on 1 January 2023. It was hoped this would raise about £14bn over six years.
How much profit do the big energy companies make?
Among the UK energy giants, BP reported a record profit of $27.7bn in 2022. While this fell to $13.8bn in 2023, it was still the firm's second highest annual profit in a decade.
Shell's profits of $39.9bn in 2022 were the highest in its 115-year history. Its 2023 profits were $28.2bn.
BP says its UK businesses account for less than 10% of global profits, while Shell makes about 5% of its revenue in the UK.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 profits for 2023 increased 10-fold to £750m. Oil and gas firms operating in the North Sea were already taxed differently before the levy was introduced
How does the windfall tax work? Oil and gas firms operating in the North Sea were already taxed differently before the levy was introduced
Prime Minister Rishi Sunak introduced the 25% Energy Profits Levy, external (EPL) in May 2022, when he was chancellor. How much windfall tax have oil and gas companies paid?
Mr Hunt increased the windfall tax to 35% in January 2023. In the financial year 2022-2023, the first year of its operation, the levy raised £2.6bn, external. In the following 12-month period it raised £3.6bn, external.
And in the 2024 Budget he announced it would remain in place until March 2029 - because, he said, the continuing war in Ukraine would extend windfall profits for energy companies. BP said its North Sea business paid $2.2bn in UK tax for its North Sea operations in 2022, of which $700m was due to the levy.
The government has said the windfall tax will end if oil and gas prices drop below a certain level for six months. In 2023 it paid $1.5bn (£1.2bn), including $720m under the levy.
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. Shell said it paid £178m in UK windfall tax for 2022.
In 2022, the government also brought in a levy on what it called "extraordinary returns" from low-carbon electricity generators in the UK. In 2023, it paid £1.1bn in overall tax in the UK, £240m of which was a result of the levy.
Larger operators started paying the Electricity Generator Levy, external on 1 January 2023. The government hopes it will raise about £14bn over six years. How much other tax do oil and gas companies pay?
How much windfall tax do companies pay? Oil and gas firms operating in the North Sea are taxed differently to other companies.
In the first tax year the windfall tax was in place 2022-2023, HMRC received £2.6bn from it. It had been forecast to bring in £5bn in the first year. They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. In contrast, other firms with profits over £250,000 a year pay 25% corporation tax.
BP said its North Sea business paid $1.5bn (£1.2bn) UK tax in 2023, of which $720m was due to the EPL. When the windfall tax is added, it means the overall tax rate faced by oil and gas companies operating in the UK is 75%, rising to 78% in November.
The year before, it paid $2.2bn in tax for its North Sea operations, including $700m from the EPL. However, oil and gas firms have been able to reduce the amount of UK tax they pay by factoring in losses or spending on things like decommissioning North Sea oil platforms.
Shell said it paid £178m in UK windfall tax for 2022. A company spokeswoman said the company paid £1.1bn in overall tax in the UK for 2023, of which £240m was taxed under the Energy Profits Levy. BP, external and Shell, external both received more money back from the UK government than they paid in tax every year from 2015 to 2020 (except Shell in 2017).
How much tax do oil companies usually pay? Energy firms have also been able to reduce the amount of windfall tax they pay through certain investment allowances.
Oil and gas firms operating in the North Sea are taxed differently. However, the government has said it will remove some of these allowances from 1 November.
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. Further details on the changes to the windfall levy will be set out in the Budget on 30 October.
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. What might be in the Budget?
As a result BP, external and Shell, external have paid almost no UK tax in recent years. What might be in the Budget?
Both firms received more money back from the UK government than they paid every year from 2015 to 2020 (except Shell in 2017). What do companies say about the planned changes?
Shell also paid a negative amount of tax in 2021, taking its 2015 to 2021 UK tax total to -£685m. The industry body Offshore Energies UK (OEUK) said the proposed changes to the windfall tax will sharply reduce investment in the sector, putting thousands of jobs at risk.
In January 2023, Shell announced that it would pay UK tax for the first time since 2017. OEUK says the expected tax paid by oil and gas producers would "increase in the very short term" by £2bn, and would later result in a £12bn loss.
BP paid more money in tax than it received back in 2021, external, taking its total for the same period to -£107m. In August, 42 companies wrote to the government to express their "grave concern" over the changes.
Will the windfall tax affect investment in oil and gas? The Treasury said the government was committed to a "constructive dialogue" with the oil and gas industry about the levy.
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. But it also said it wanted North Sea oil and gas producers "to contribute their fair share towards our energy transition" away from fossil fuels.
And if they spend £100 decarbonising the way they extract oil and gas they can claim up to £109.25 in tax benefits. Where does the UK get its energy from?
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. Where does the UK get its energy from?
The £3.1bn investment in Rosebank will qualify the companies involved for up to £2.9bn in tax relief. Is the UK on track to meet its climate targets?
In November 2022, Shell said it would "have to evaluate each project on a case-by-case basis", external, having previously planned to invest up to £25bn over the next decade. Is the UK on track to meet its climate targets?
BP plans to spend, external up to £18bn on the UK's energy system by 2030 and said in May 2022 that all planned UK investments would continue. What is Great British Energy and what will it mean for the UK?
What is Great British Energy and what will it mean for the UK?
Related topicsRelated topics
TaxTax
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Energy industryEnergy industry
North Sea oil and gasNorth Sea oil and gas
BPBP