Energy (Oil and Gas) Profits Levy Bill — House of Lords, 2022-07-13
Topic: Energy
Joanna Penn (Conservative, Centre-right): My Lords, we will take a little more time over this Bill. We are here to debate the Energy (Oil and Gas) Profits Levy Bill, introduced in the House of Commons. It may be helpful to start with a little of the context behind the Bill People across this country are facing rising energy costs and an increase in their overall cost of living. Of the basket of goods and services we use to measure inflation, a record proportion are seeing above-average price increases. Indeed, this country is now experiencing the highest rate of inflation we have seen for 40 years, and this is causing acute distress to the people of this country In May the Government announced a series of measures to help the British people during this difficult time—a period in which we have seen prices in oil and gas reach new heights. Oil prices have nearly doubled since early last year and gas prices have more than doubled. This is a global phenomenon, driven by factors out of any single Government’s control and in part by Russia’s war With increased prices at this global level, profits from oil and gas extraction in the UK have also shot up. These are unexpected, extraordinary profits, above and beyond what forecasters could have expected the sector to earn. Because of these extraordinary profits and to help fund more cost of living support for UK families, the Government are introducing the energy profits levy. This temporary levy is a new 25% surcharge on these extraordinary profits. When oil and gas prices return to historically more normal levels, it will be phased out. However, we have a responsibility to help those who, through no fault of their own, are paying the highest price for the inflation we face I now turn to the content of the Bill. As set out in the energy security strategy, the North Sea will still be a foundation of our energy security. Indeed, currently around half of our demand for gas is met through domestic supplies. In meeting net zero by 2050, we may still use a quarter of the gas that we use now. It is therefore necessary to encourage investment in oil and gas, encouraging companies to reinvest their profits to support the economy, jobs, and the UK’s energy security It is possible to both tax extraordinary profits fairly, and to incentivise investment. That is why, within the energy profits levy, a new super-deduction style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK. The Government expect the energy profits levy, with its investment allowance, to lead to an overall increase in investment. The new 80% investment allowance means that businesses will get a 91p tax saving overall for every £1 they invest, providing them with an additional immediate incentive to invest. This nearly doubles the tax relief available and means that the more investment a firm makes, the less tax it will pay. It means that the allowance can be claimed when the spending on the investment is actually incurred. This is unlike the allowance under the existing permanent tax regime for oil and gas companies, which can be claimed only once income is received from the field subject to the investment. As noble Lords may know, this can take several years I will provide some clarity on what the investment allowance will apply to. First, if capital or operating expenditure qualifies for the supplementary charge allowance, it will qualify for the energy profits levy allowance. Since the levy is targeted at the extraordinary profits from oil and gas upstream activities—that is, the profits that came about due to the global price increases—it makes sense that any relief for investment must also be related to oil and gas upstream activities. Secondly, such spending can be used to decarbonise oil and gas production, through electrification, for example. Therefore, any capital expenditure on electrification, as long as it relates to specific oil-related activities within the ring-fence, will qualify for the allowance. Examples of electrification expenditure on plants and machinery are generators, which include wind turbines, transformers and wiring I remind noble Lords that there are other tax and non-tax levers to support non-oil and gas investments, such as in renewables. These levers include the super-deduction and the UK’s competitive R&D tax credit regime. Importantly, returns on these investments are taxed at 19%, rather than 65%, as for UK oil and gas profits The Government have been listening closely to industry feedback. Late last month, the former Chancellor met industry stakeholders in Aberdeen to discuss the levy and make sure it works as the Government intend. Since then, the Government made a change to the legislation, which is reflected in the Bill. Tax repayments that oil and gas companies receive from the petroleum revenue tax related to losses generated by decommissioning expenditure will not be taxed under the levy. These repayments are typically taxed under the permanent tax regime, but, since wider decommissioning expenditure is also left out of account for the levy, this change is consistent and fair. I reassure noble Lords that, with this change, the Government still expect the levy to raise around £5 billion over the next year Finally, I turn to how long the levy will be in place. It will take effect from 26 May this year, and it will be phased out when oil and gas prices return to historically more normal levels. The sunset clause in the Bill ensures that the levy is not here to stay. Very few taxes have expiry dates set in law, so this provision demonstrates the Government’s commitment to keeping the levy temporary, and it gives oil and gas companies further reassurance, as they seek to plan their investments The Bill, and the levy it legislates for, should be seen against the backdrop of the reality that we find ourselves in: people are in hardship across the country, while businesses in the UK oil and gas sector have made profits surpassing their expectations, reflecting the extraordinary global context. Through the Bill, the levy will raise around £5 billion of revenue over the next year. This is not about maximising revenue for the Exchequer but about targeted objectives: to help with significant targeted support for millions of the most vulnerable, and to encourage the oil and gas sector to reinvest its profits to support the economy, jobs and the UK’s energy security. For these reasons, I commend the Bill to the House.