Windfall Tax Suspension Contingent on Energy Price Normalization, Government Announces

The government has revealed that the windfall tax imposed on oil and gas companies will be suspended if energy prices return to normal levels for a sustained period. This move would reduce the overall tax rate on energy firms from 75% to 40%.

The windfall tax was introduced last year to support a scheme aimed at lowering energy costs for households and businesses. It specifically targets firms that benefit from external factors beyond their control. The recent surge in energy firm profits was initially driven by increased demand following the lifting of COVID-19 restrictions, and later exacerbated by Russia’s invasion of Ukraine, which led to higher energy prices. However, oil and gas prices have now declined from their peak levels.

According to the Treasury, the windfall tax will remain in effect until March 2028, but the tax rate will decrease if the average prices of oil and gas fall to or below specified levels for two consecutive three-month periods. The set levels have been determined as $71.40 per barrel for oil and £0.54 per therm for gas, while current prices stand at around $75 per barrel for oil and £0.62 per therm for gas.

Energy companies have been urging the government to reduce the windfall tax, citing its negative impact on investment. Several firms have already announced job cuts and reductions in investment due to the tax extension. Acknowledging these concerns, the Treasury emphasized that a decline in investment jeopardizes the long-term domestic energy supply, potentially leading to increased reliance on imports and higher costs for households and businesses.

The windfall tax, known as the Energy Profits Levy, was introduced by Prime Minister Rishi Sunak in May of the previous year when he served as chancellor, with an initial rate of 25%. Chancellor Jeremy Hunt later announced an increase to 35% from January 2023. The levy applies specifically to profits derived from extracting oil and gas in the UK, while other activities such as oil refining and fuel sales are exempt. Additionally, oil and gas companies operating in the North Sea already face a 30% corporation tax on profits, along with a supplementary 10% rate. Consequently, with the windfall tax in place, the overall tax rate for oil and gas companies reaches 75%. Suspending the windfall tax would return the overall tax rate for energy firms to 40%.

The announcement was welcomed by trade body Offshore Energies UK, although it emphasized that the industry still faces challenges and called for further measures to restore confidence and stimulate investment. However, critics such as Global Witness’s Alice Harrison deemed the possible suspension of the windfall tax “obscene,” arguing that it would benefit already profitable companies at the expense of the public. Greenpeace UK’s Georgia Whitaker similarly advocated for higher and permanent taxes on oil and gas firms, with the revenue directed toward energy transition and home insulation initiatives.