Taxation of North Sea oil and gas

What taxes are paid on North Sea oil and gas?

Companies operating in the North Sea pay three separate profit-related taxes on oil and gas production: ring fence corporation tax, supplementary charge, and petroleum revenue tax (PRT). Total receipts from these taxes are forecast to be £11.0 billion in 2022/23.

How have tax receipts from oil and gas changed in recent years?

Receipts from taxes on the profits from North Sea oil and gas production have fluctuated dramatically over the last thirty years, following peaks and troughs in world oil prices. In the last decade receipts have fallen substantially from £10.6 billion in 2008/09 to £600 million in 2019/20. As a percentage of national income (GDP), receipts have fallen from 0.7% of GDP in 2008/09 to 0.03% of GDP in 2019/20.  The Office of Budget Responsibility (OBR) note that this fall in receipts has largely been driven by falling production and higher tax-deductible expenditure, as well as cuts in the rates of PRT and the supplementary charge.

Petrol and diesel prices have risen strongly over the past year. UK oil and gas tax revenues rose from £300 million in 2020/21 to £2.6 billion in 2021/22. The OBR currently forecast tax receipts over the six-year period 2022/23 to 2027/28 will average £8.6 billion, up from an average of £0.8 billion over the six years to 2021/22. They note that although these receipts are large relative to recent years, relative to the size of the economy the figures “remain modest by historical standards.”

How have North Sea oil and gas taxes changed since 2000?

Over the last twenty years there have been three major reforms to the fiscal regime.

• In its 2002 Budget the Labour Government introduced the ‘supplementary charge’ on ring fence profits. The charge was first set at 10%. Subsequent increases in oil prices and industry profits led to the then Chancellor, Gordon Brown, announcing as part of the Pre-Budget Report in December 2005 that the charge would be set at 20% from January 2006.

• In the 2011 Budget the then Chancellor, George Osborne, announced that the supplementary charge would be set at 32%, while tax relief for companies’ expenditure on decommissioning would be restricted. At the time Mr Osborne proposed that the extra receipts would be used to cut excise duties on road fuel: a 1p cut in the main duty rate, a suspension in the duty ‘escalator’ – the commitment to increase duty rates in real terms each year – introduced by the Labour Government in 2009, and a delay in the two inflation-only increases set for April 2011 and April 2012. 

• Mr Osborne went on to explain that if oil prices fell back down ‘on a sustained basis’, the extra supplementary charge would be removed, and the duty escalator would be re-imposed. In the Autumn Statement in December 2014 the then Chancellor George Osborne announced a number of changes in the wake of the reductions seen in global oil prices, including a cut in the rate of the supplementary charge from 32% to 30%. Mr Osborne also withdrew the commitment to raise excise duties on road fuels in the event of lower oil prices.

• As oil prices continued to fall, Mr Osborne announced a second series of measures in his Budget four months later, including a cut in the supplementary charge to 20%, backdated to January 2015, and a reduction in the rate of petroleum revenue tax, from 50% to 35%, from 1 January 2016. The following year the Chancellor announced the supplementary charge would be set at 10%, and the rate of petroleum revenue tax would be set at 0%, effectively abolishing the tax. Both changes took effect from 1 January 2016.

What did the Government announce in May 2022 about a windfall tax?

Following speculation that the Government would introduce a one-off ‘windfall tax’, in response to the rise in world oil and gas prices and the consequential boost in profits from North Sea oil and gas production the then Chancellor Rishi Sunak gave a statement on 26 May 2022.

Mr Sunak announced a new Energy Profits Levy, charged on oil and gas profits at a rate of 25%. The Levy has effect for profits arising on or after 26 May 2022. The Chancellor stated the Levy would be temporary, and the legislation to establish it would include a sunset clause to remove the tax after 31 December 2025. At the time the Treasury estimated the Levy would raise around £5 billion in its first 12 months. A technical note published by HM Treasury provided more details of how the Levy would work.

In his statement the Chancellor announced a number of measures to support households with the cost of living, funded, in part, by the Energy Profits Levy. Although not directly related to the Levy, the Department for Work and Pensions has published guidance on how households could receive financial support if they were getting certain benefits or tax credits.

The Levy was legislated for via a standalone Bill. The Energy (Oil and Gas) Profits Levy Bill [Bill 135 of 2022-23] was introduced on 5 July 2022, and the Energy (Oil and Gas) Profits Levy Act 2022 received Royal Assent on 14 July 2022. The Bill, with its explanatory notes, is published on the Bill’s page on Parliament.uk.  Commons Library briefing Energy (Oil and Gas) Profits Levy Bill 2022-23 discusses the Bill in more detail.

What changes were announced to this windfall tax in Autumn Statement 2022?

In the Autumn Statement on 17 November 2022 Chancellor Jeremy Hunt announced that the rate of the Energy Profits Levy would be increased to 35% from 1 January 2023, and that the lifetime of the Levy would be extended for a further two years to 31 March 2028.

The Chancellor also announced the Energy Generator Levy – a new temporary 45% levy on electricity generators – to be introduced from 1 January 2023. Details of these changes were given in a factsheet published by HM Treasury published alongside the Autumn Statement.

The OBR currently forecast that receipts from the Energy Profits Levy to be £25.9 billion between 2022-23 and 2027-28, and receipts from the Electricity Generator Levy to be £14.0 billion over the same period.

Further reading

HM Revenue & Customs publish detailed statistics on government revenues from UK oil and gas production.

The approach of Labour, Coalition and Conservative Governments since 2010 to taxing road fuels is discussed in a Library briefing: Taxation of road fuels.

The Library briefing Petrol and diesel prices looks at trends in the price of petrol and diesel at the pump and before tax, possible reasons for the gap in prices between the two fuels and compares prices and taxes in different countries.

There have been two occasions in recent times where a windfall tax has been introduced in the UK: first, a levy introduced by the Conservative Government in 1981 on bank deposits, in the context of the sector’s record profits from high interest rates; and second, a tax introduced by the Labour Government on utility companies that had been privatised by its Conservative predecessor. A Library briefing published in 2004 discusses both taxes in more detail: The Windfall Tax.