The UK’s first female chancellor said her budget will drive economic growth and “invest, invest, invest”.
However, there has been scepticism that her confirmation of the extension of the energy profits levy (EPL) and removal of the 29% investment allowance will enable North Sea businesses to invest in the energy transition she desires.
Trade body Offshore Energy UK bemoaned “a difficult day for the sector” after Reeves confirmed that the government will increase and extend the energy profits levy on oil and gas production to a headline rate of 78% and remove the associated investment allowance, but will retain the 100% first-year capital allowance and a 66% decarbonisation allowance which the Treasury said meant its “cash value is maintained”,
The Chancellor also confirmed that the EPL will fall away in March 2030. The energy security investment mechanism (ESIM) remains in place, which should “give businesses confidence that EPL will no longer apply if prices fall”.
The Labour government further pledged to publish a consultation in early 2025 on a “successor regime” to support “long-term stability and predictability in the oil and gas fiscal regime” after the EPL ends.
The independent Office for Budget Responsibility (OBR) said it has now assumed that offshore energy capital expenditure will be 26% lower over the forecast period, with oil production 6.3% lower and gas production 9.2% lower compared to its March forecast.
The budget also confirmed how much would be spent in the next year on major previous announcements including the establishment of GB Energy and £21.7 billion for carbon capture and storage.
The budget delivered £125 million towards the first step establishing Great British Energy in Aberdeen.
This came with £500m investment in hydrogen production and infrastructure, along with the £1 billion allocated for the track1 CCS projects.
Reeves said its investment in GB Energy “crowd in” private capital, which is critical to delivering the energy transition.
According to Aurora Energy Research, of the £8.3bn previously committed, £3.3bn will be used to support local power plans, while £5bn has been allocated to project investment with a particular focus on less established technology classes.
Plans were also announced for a carbon capture usage and storage (CCUS) decommissioning fund. The government said it will legislate in its Finance Bill 2024-25 to provide relief for payments oil and gas companies make into a fund for assets sold for use in CCUS, maintaining the tax treatment had these assets instead been decommissioned. This legislation will also remove receipts from the sale of these assets from the scope of the EPL.
The government also confirmed funding for major Tory policy initiatives in port infrastructure including investment zones and freeports across the UK.
This will include plans for the establishment of an investment zone in Aberdeen and Glasgow, both of which lost out in a competition for Scottish green freeports established in the Highlands and the Firth of Forth.
It confirmed the East Midlands Investment Zone to support advanced manufacturing and green industries and said that five new customs sites will be designated in existing freeports “shortly”. The government pledged to ensure the freeports policy model aligns with a national Industrial Strategy, due out now in Spring.
Electric vehicles
Drivers of hydrocarbon-powered vehicles could breathe a sigh of relief as the Chancellor gave up the £3bn it could have raised and maintained a freeze in fuel duty. She estimated this represents a £59 saving for the average car driver.
However, buyers of new electric vehicles (EVs) will pay the lowest vehicle excise duty (VED) first year rate at £10 until 2029-30.
For fleet operators, company car tax (CCT) rates will continue to strongly incentivise
the take-up of electric vehicles, while rates for hybrid vehicles will be increased to
align more closely with rates for internal combustion engine.
UK Export Finance will now support companies supplying critical minerals to UK exporters in growth-driving sectors such as EV battery production, clean energy, aerospace and defence.
This new support targets projects that secure critical minerals from overseas and will boost supply chain resilience in key manufacturing sectors.
Finch consultation
The budget was also the occasion for the government to fire the starter gun on a consultation which will have wide spread implications for the the future of the North Sea.
The consultation with industry on updated environmental guidance follows a Supreme Court ruling and has also been launched from 30 October.
The ruling set a legal precedent that requires regulators to consider the impact of burning oil and gas, called scope 3 emissions, in the environmental impact assessment (EIA) for new projects.
Major North Sea fields including Shell’s Jackdaw and Equinor’s Rosebank are facing to legal challenges brought by environmental groups against the decision to approve their development consents following the so called Finch ruling.
Other measures
The budget also contained news of a key measure for carbon pricing in the wake of the UK’s departure from the European Union.
The government has published a response to the March 2024 consultation on the introduction of a UK carbon border adjustment mechanism (CBAM), which confirms the UK will introduce it’s own version on 1 January 2027. The UK CBAM will place a carbon price on goods that are at risk of carbon leakage imported to the UK from the aluminium, cement, fertiliser, hydrogen and iron and steel sectors. However, products from the glass and ceramics sectors will not be in scope of the UK CBAM from 2027 as previously proposed.
Law firm Pinsent Masons legal director Penny Simmons said: “It is disappointing that there were no new significant environmental tax policy announcements in today’s Budget to support the UK’s green transition. The government should be prioritising how the tax system can be used to support and incentivise decarbonisation and the development of green technology.
“Whilst the government has finally confirmed its intention to introduce a UK Carbon Border Adjustment Mechanism, this should form part of a much wider package of ‘climate focused; tax measures.”
All employers
Most energy firms will also be affected by the rise in employer national insurance (NI) while others will be affected by taxes aimed at private equity investors.
The rate of Employers’ National Insurance will increase by 1.2 percentage points, to 15%.
The secondary threshold – the level at which employers start paying national insurance on each employee’s salary – will reduce from £9,100 per year to £5,000 per year.
The smallest businesses will be protected as the employment allowance will increase to £10,500 from £5,000, allowing firms to employ four national living wage -level workers full time without paying employer national insurance on their wages.
Capital gains tax (CGT) will increase from 10% to 18% for those paying the lower rate, and 20% to 24% for those paying the higher rate.
To encourage entrepreneurs to invest in their businesses, business asset disposal relief (BADR) will remain at 10% this year, before rising to 14% on 6 April 2025 and 18% from 6 April 2026-27.
The lifetime limit of BADR will be maintained at £1,. The lifetime limit of investors’ relief will be reduced from £10m to £1m.
The OBR said changes to CGT will raise over £2.5bn a year.
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