The UK introduces a 25% tax on “extra” profits of oil and gas companies

The UK government will introduce an additional tax (fee) on oil and gas companies. This was announced yesterday by the Chancellor of the Exchequer Rishi Sunak.

We are talking about a 25 percent tax on “wind-blown” income (eng. windfall tax), that is, such income that is received as a result of extremely favorable market conditions (high oil and gas prices).

The tax will be targeted. It is expected to raise around £5bn to fund £650 in one-time grants for more than 8m of the UK’s poorest households.

This is a temporary measure. “When oil and gas prices return to historically more normal levels, the levy will be phased out and an end clause will be written into the law,” says Sunak.

The final details of the new law are not yet known.

According to Seeking Alpha, the UK has a rather complicated taxation and royalty regime for oil and gas producers. All UK resident companies pay corporate income tax on pre-tax profits worldwide. If BP makes profits from oil refining in the US, it will pay tax on those profits to the UK Treasury. However, the UK also charges producers in the North Sea with corporate tax, “supplementary charge”, “oil income tax” and “value-added tax”. Deloitte estimates that the effective “government share” of pre-tax profits for UK North Sea producers is between 62% and 81%.

While the Chancellor did not specify who would pay the additional 25% tax, it is likely to be imposed on company income generated in the UK.

As compensation, the government introduces tax incentives tied to investments in the oil and gas business. “For every pound sterling the company invests, it will receive 90% tax relief.”

Sunak did not rule out the application of a similar fee to electricity producers but said that this idea requires further elaboration.