Following months of rumors and indecision, the UK government announced on Thursday a 25% Energy Profits Levy, commonly referred to as a "windfall tax", as part of a package to ease the cost-of-living crisis stemming from huge rises in household energy bills.
The UK Chancellor of the Exchequer, Rishi Sunak, announced on Thursday a new temporary 25% Energy Profits Levy for oil and gas companies, reflecting their extraordinary profits as oil and gas prices surged.
The move has long been opposed by the industry, which argues that a windfall tax would add uncertainty to the UK tax regime and will hit new investments in the UK North Sea at a time when the UK grapples with reducing reliance on foreign imports of oil and gas.
Despite numerous calls and letters from the offshore operators and offshore services firms not to impose a windfall levy, the UK government proceeded with it and said that the new levy "will include a generous new 80% investment allowance."
"This balanced approach allows the government to deliver support to families, while encouraging investment and growth," the UK government said.
The Energy Profits Levy will apply to profits arising on or after May 26, 2022. The tax is temporary and will be phased out when oil and gas prices return to historically more normal levels. The legislation will also include a sunset clause, which will remove the tax after December 31, 2025, the UK government said. The new tax will be charged on oil and gas company profits at a rate of 25% and is expected to raise around $6.3 billion (£5 billion) in its first 12 months, which will go towards easing the burden on families.
The windfall tax announcement, dismissed for months by the conservative UK government, comes a day after a damning report about parties held at Downing Street during the strict nationwide lockdown in the UK in late 2020, when households were not allowed to meet and mix.
The windfall tax was also introduced two days after the UK's energy market regulator warned that the UK hadn't seen the worst of its cost-of-living crisis as energy bills could soar by another 42% in less than six months' time when Ofgem will raise the so-called energy cap again.
Before the announcement of the windfall tax, the main industry body, Offshore Energies UK, warned that such a levy risks reduced energy security, higher prices for consumers, and long-term damage to the UK's offshore energy industry.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More