Chancellor Rachel Reeves has set out plans to remove the “unjustifiably generous investment allowances” oil and gas firms receive through the energy profits levy.
Labour has stuck to its guns despite industry outcry regarding its energy profits levy (EPL) reform as it outlined plans to increase the rate paid by North Sea operators by three percent.
The rise will come into effect as of 1 November 2024. The period that the levy applies is also being extended to 31 March 2030, which is the end of the financial year in which the current Parliament is due to finish.
Labour vowed to raise the rate of the EPL, or windfall tax, to bring the headline rate of tax paid by UK firms to 78% while “closing loopholes” in the existing policy during its successful election campaign.
A UK government statement explained: “Today the government is announcing that the rate of the Energy Profits Levy will increase to 38% from 1 November 2024, bringing the headline rate of tax on upstream oil and gas activities to 78%.”
© Supplied by ShutterstockAhead of its landslide win this summer, the Labour Party had also set out plans to “close loopholes” in the windfall tax.
“The government will also remove unjustifiably generous investment allowances from the Energy Profits Levy, including by abolishing the levy’s main 29% investment allowance for qualifying expenditure incurred on or after 1 November 2024,” today’s statement explained.
Tax ‘reckless, wrong and economically ruinous’
Aberdeen and Grampian Chamber of Commerce (AGCC) hit out at the move and warned it risked losing £20billion in revenues for the Treasury.
Responding to the statement from Chancellor Rachel Reeves, Russell Borthwick, chief executive of AGCC, said: “This decision is reckless, wrong and economically ruinous for the North sea and ignores the explicit warnings of industry, investors and unions.
“The Chancellor should be on the next flight to Aberdeen and meet with the companies who will be pulling investment from the UK and the workforce who will be extremely worried for their future.
“The new government is pushing the North Sea dangerously close to ‘game over’ territory and this will, in turn, put our energy transition at risk.
“Instead of seeing the energy sector as the solution to challenges in the UK’s public finances, the Chancellor has taken the wrongheaded decision to tax the industry into oblivion.
“The consequence of that will be £20billion lost in revenues to the Treasury, even more reliance upon imported oil and gas – worse for the planet and the economy – and tens of thousands of jobs placed in jeopardy.
“Confidence in the UKCS is already at rock bottom. Unless the UK government rolls back from this position on the Energy Profits Levy then we’re facing the destruction of industry on a scale not seen in over thirty years.”
‘This is not partnership’
Reacting to the policy paper issued late in the afternoon and without warning after the Chancellor’s fiscal statement, trade body Offshore Energies UK (OEUK) was also up in arms.
OEUK CEO David Whitehouse said: “This is not partnership working between government and industry. These announcements have been made without meaningful engagement with this sector.
© Supplied by OEUK“We recognise the Government has significant spending challenges to manage but today’s announcement will only serve to rock confidence further.
“The offshore energy sector supports over 200,000 jobs. These are real people, working in our energy industry today. Today’s announcement jeopardises jobs in communities across the UK. This is something the Prime Minister committed in his manifesto not to do.
“Announcements like this without engagement is no way to treat these hard-working people.
“We have tonight spoken to the Treasury Minister and expect further and urgent engagement with the sector.”
‘Kick in the teeth’ for North East
Opposition political parties also reacted strongly to Labour confirming it would follow through on its manifesto promise.
Conservative shadow energy minister and West Aberdeenshire and Kincardine MP Andrew Bowie labelled the policy a “supertax”.
“Tens of thousands of Scots, whose jobs are now hanging in the balance, will wonder what they have done to Labour to justify this supertax on North Sea oil and gas,” Bowie said.
© Olaf Kruger/imageBROKER/Shutterstock“To label the careful balance involved in driving net zero, while keeping the lights on, as ‘unjustifiably generous’, is a kick in the teeth for the North East.
“Labour have decided on harsh and unfounded sanctions for the industry, and will have to bear the responsibility of what happens from now on.”
Meanwhile, SNP Westminster leader and Aberdeen South MP Stephen Flynn said he has “grave concerns” over the impact of the changes on the energy industry.
“I have grave concerns over the impact that this political choice will have on our energy industry, our ability to deliver on the energy transition and the wider economic future of Aberdeen,” Flynn said.
“I will be seeking immediate engagement with representatives from the sector to fully quantify the impact that this decision will have on investment.”
The importance of investment allowances
Investment allowances are a key component of Norway’s taxation policy as the country incentivises firms to reinvest within Nordic waters.
The former mayor of Stavanger and president of Offshore Europe’s sister event ONS, Leif Johan Sevland, told Energy Voice about the importance of such investments to his country’s energy sector success ahead of the general election.
He said: “Those incentives, without them we wouldn’t have succeeded at all.
“There is a kind of flexibility in the Norwegian system, you’re paying high tax, but then you have a lot of incentives whatever you’re doing which makes for running in a good way.
“There’s no debate in Norway about that, it’s accepted, that’s the way it should be. I think the companies are living fairly good with it as well, I say fairly good because you should always complain about tax.”
© James Glossop/The Times/PA WireHowever, changes to investment allowances may not spell disaster for oil firms as “there are no plans to change the availability of capital allowances in the permanent regime.”
Senior analyst for Wood Mac James Reid previously told Energy Voice: “The worst case scenario that the industry is very worried about is the removal of the capital allowances as well.
“For a pre-production project, losing those capital allowances would significantly harm the economics of these projects.”
The government has also said that it will maintain the decarbonisation investment allowance that is currently part of the EPL.
The windfall tax currently has two investment allowances, the 29% investment allowance and the 80% decarbonisation investment allowance.
The statement added: “Further details on these changes will be set out at the Budget.”
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