Tue, 12 Dec 2023

How oil and gas company tax reliefs could lose the UK billions

The Conversation
05 Oct 2023, 04:39 GMT+10

The recently-approved Rosebank oil field in the North Sea has been touted as a way to boost the UK economy and its energy security. But even with its windfall tax on energy company profits, the project is a good example of how the UK could miss out on billions in taxes over the life of an oilfield.

Energy companies Equinor and Ithaca expect to invest Pound 8.1 billion in Rosebank from development, during its operation and when they decommission the field once they've finished extracting its oil. Of this, 78% will be invested in UK-based businesses, and the project will support 1,600 jobs at the height of construction and around 450 UK-based jobs over its entire lifetime.

The UK charges a headline 75% rate of tax on all UK energy production and so, at first glance, a major project like Rosebank would be expected to generate billions in tax payments for the UK Treasury over the years. But, according to my research, it could instead create billions in tax savings for the companies involved.

Read more: UK energy windfall tax: what it is and why it needs to change

Of the 75% tax that energy companies are currently charged, profits from oil and gas extraction in the UK are charged a corporate tax of 30%, supplemented by an extra 10% charge. The other 35% in taxes comes from the UK's windfall tax.

Such levies are typically used to redistribute profits when a company benefits from external circumstances. For example, energy companies have recently seen profits soar as prices rose due to concerns about satisfying global oil and gas demand during Russia's invasion of Ukraine.

The UK rolled out an additional 25% windfall tax in 2022 for oil and gas companies in response to this profit spike. On January 1 2023, the government increased it to 35% until at least the spring of 2028. The UK government raised Pound 2.6 billion from the windfall tax alone last year.

When the windfall tax is added to the 30% rate and the 10% extra, that makes for a whopping 75% tax on energy companies. This seems like a lot, but the reliefs and other tax breaks open to companies often help a lot of these charges disappear. When a business invests its profits, it can benefit from first-year capital allowances, subtract costs related to daily operations and gain additional investment allowances that can be saved up to reduce taxes on future profits.

Crunching the numbers

If an oil company makes Pound 10 million, for example, current tax rules would claim Pound 7.5 million from this. But if the company reinvests the earnings in oil and gas extraction, it wouldn't just zero out its tax, it could also set aside an extra Pound 1.6 million against future gains - or Pound 3.4 million if it invests in decarbonisation.

Project this on to Equinor and Ithaca's multibillion-pound Rosebank investment and it could generate up to Pound 8.4 billion in tax savings for the companies involved, based on my analysis of levies on energy producers,

A spokesperson for Equinor told The Conversation: "These are numbers we don't recognise." Adding that estimates by energy consultancy Wood Mackenzie found Rosebank would bring Pound 26.8 billion to the UK through tax payments and investments, he continued: "Over the years, oil and gas taxation in the UK has changed many times. It is impossible to estimate with any certainty exactly how large tax revenue and value creation this project will generate for the UK." Ithaca did not respond to a request for comment.

Many players in the UK's oil and gas sector can take advantage of a range of capital and investment allowances, deductions and taxation reliefs. In fact, before the windfall tax, companies often got back more from the UK government than they paid in taxes.

The windfall tax will expire in 2028 or if energy prices fall below a certain level for six months. And so while it has forced some companies pay tax on some recent bumper profits, it won't always be around to make even that happen.

Shortsighted or strategy?

Compared to nations like Norway that offer more long-standing corporate tax regimes, the UK's history is riddled with policies that have been swayed by short-term political urgencies. This sidelines long-term vision and provides a very weak signal to companies considering investment in the UK.

A revolving door of UK prime ministers in recent times hasn't helped and has also seen investors lose some confidence in the country's economy. A slew of lucrative tax reliefs might seem like the perfect way to counterbalance recent policy oscillations.

Central to the UK's energy strategy is an intent to ramp up extraction, ostensibly to enhance national energy security. But will this happen with Rosebank?

When asked about this, the Equinor spokesperson said: "Rosebank will strengthen our contributions to UK energy security. The field is estimated to start producing in 2026/2027 and produce for more than 20 years. The gas will go into the UK pipeline system. The oil will be offloaded offshore. It is a light, sweet crude oil that can be used in refineries in the UK. If the UK needs the oil, when the field starts producing, the UK will get it."

But Equinor, like other energy companies drilling in UK oilfields, doesn't have to sell what it drills back to the UK.

The UK continues to feed the oil and gas industry with reliefs, while renewable energy projects (but not gas-generation) face the electricity generator levy - a 45% charge on power generated above a Pound 75 per megawatt hour (MWh) threshold. As much of the rest of the world moves towards more sustainable energy solutions, the UK should realign its tax priorities with the broader, greener global vision.

Author: Karl Matikonis - Assistant Professor, University College Dublin The Conversation

More Ireland News

Access More

Sign up for Ireland News

a daily newsletter full of things to discuss over drinks.and the great thing is that it's on the house!