Fears over energy tax rises as business confidence falls

The UK government’s plan to increase the windfall tax on oil and gas companies has raised serious concerns within the industry. Offshore Energies UK (OEUK) has warned that this tax hike could undermine the government’s economic growth goals by significantly reducing sector investment and threatening thousands of jobs.

According to OEUK, the proposed increase in the Energy Profits Levy (EPL) from 35% to 38% starting November 1 is expected to have detrimental effects. The hike would elevate the total tax rate on profits made by energy firms in the UK to 78%, considering the existing 30% corporation tax and an additional 10% supplementary rate on North Sea operations.

OEUK predicts that the tax increase will lead to a dramatic decline in investment, forecasting a drop from £14 billion to just £2 billion by 2029. This reduction in investment is anticipated to result in a £13 billion loss to the UK economy and put approximately 35,000 jobs at risk by the end of the decade.

The organization argues that these changes would “undermine” the energy sector’s ability to contribute to economic growth. OEUK’s chief executive, David Whitehouse, criticized the policy, stating, “This is a government that has made economic growth its main priority, and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy.”

The concerns over the tax hike are compounded by a broader sense of uncertainty in the business environment. Anna Leach, chief economist at the Institute of Directors, noted that discussions about tax increases and changes in employment rights have significantly impacted business confidence. Investment intentions for the upcoming year have sharply declined, and expectations for revenue and employment have also decreased.

Leach emphasized the need for the government to develop a stable and predictable policy framework to restore business confidence and encourage investment. She urged the government to carefully design policies that will support long-term economic stability.

The Treasury has acknowledged the industry’s concerns and reiterated its commitment to engaging in “constructive dialogue” with the sector. A Treasury spokesperson assured that the government aims to balance necessary tax adjustments with maintaining a supportive environment for the North Sea industry. They also highlighted upcoming initiatives like the National Wealth Fund and Great British Energy, which are expected to create new job opportunities in emerging industries.

The EPL, initially introduced by former Prime Minister Rishi Sunak in May 2022, was a response to the soaring energy prices following the end of Covid lockdowns and the impact of Russia’s invasion of Ukraine. This windfall tax was designed to help mitigate the impact of high energy bills on households by funding support schemes, which have now ended.

Despite a reduction in energy prices from the 2022 highs, they remain elevated, and household energy bills are set to rise by 10% from October. OEUK argues that the EPL was initially meant as a temporary measure and that current oil and gas prices have normalized, making the extension of the tax unnecessary.

Whitehouse cautioned that time is running out to address the negative impacts of the proposed tax changes. He called for a transparent dialogue between the government and the energy sector to find a solution that does not jeopardize jobs or investment.

The debate over the energy tax highlights a broader issue of balancing fiscal policy with economic growth and investment. As the government prepares for the autumn Budget, where more details on tax and spending will be revealed, the industry’s concerns reflect a wider anxiety about the implications of policy changes on business confidence and economic stability.