Windfall tax on oil and gas profits takes a step closer to becoming law

The UK Government’s windfall tax on the soaring profits of oil and gas companies has taken a step closer to becoming law.

The new levy on oil and gas profits was announced by the then-chancellor Rishi Sunak in May, following Labour’s calls for a windfall tax in light of rising energy prices.

The tax will be used to pay for measures to support struggling households with the rising cost of living.

As MPs debated the Energy (Oil and Gas) Profits Levy Bill, Labour urged ministers to assess the impact of backdating the levy to January this year.

Shadow Treasury minister James Murray said: “We would urge all Conservative MPs to support our amendment and apply the windfall tax from January 9, the day the shadow chancellor (Rachel Reeves) set out our plans, rather than leaving it only to start from May 26, the day the former chancellor finally changed his mind.

“Those extra months would raise an extra £1.9bn for the public finances which we then urge the Government to put towards removing VAT on domestic energy bills for the rest of this year.”

Murray added that Labour did not believe a planned tax break for oil and gas producers within the levy is “right”, as it “undermines the windfall tax”.

He added: “It does not even work on its own terms and it flies in the face of the urgent need to respond to the climate crisis.”

Elsewhere in the debate, a Conservative MP said the levy should be scrapped under the new Chancellor, Nadhim Zahawi.

South Thanet MP Craig Mackinlay told the Commons he “had hoped that with the change of Chancellor that we would have quietly disposed of this Bill and not progressed with it to second reading”.

Mackinlay argued “we may get £5bn out of this”, but insisted “we will be losing in my view, over time, more than £5bn in the lost opportunity of businesses being attracted to the UK”.

Conservative MP for Waveney Peter Aldous, who chairs the all-party parliamentary group for offshore oil and gas, warned that any levy on the oil and gas sector, if poorly thought through, could have a “negative impact” on investment in emerging industries.

He added: “It’s important to point out that those activities taking place on the UK Continental Shelf are not just the extraction of oil and gas, but also there’s emerging new lower-carbon industries such as offshore wind, hydrogen production, and carbon-capture utilisation and storage, all of which are inextricably linked.”

Green MP Caroline Lucas (Brighton Pavilion) called on the Government to assess the merits of making the levy permanent.

She told the Commons: “The reason that I am proposing a permanent taxation is because the UK currently has the lowest tax take in the world from an offshore oil and gas regime. That is not a badge of honour, that should be a badge of shame.”

Treasury minister Lucy Frazer said: “This Bill delivers the Energy Profits Levy, a 25% surcharge on the extraordinary profits the oil and gas sector is making. As we’ve discussed, it will raise around £5 billion over the course of the next year and it will go towards supporting people with the cost-of-living measures that we have already announced in May.

“The Bill also provides for the new 80% investment allowance, meaning that businesses will overall get a 91 pence tax saving for every pound that they invest and finally it gives certainty by including a sunset provision. It will give therefore businesses further reassurance that the Levy is indeed temporary.”

Frazer later urged MPs to reject amendments to the Bill, telling the Commons it was “not usual to bring forward public assessment of measures that we are not introducing”, such as backdating the levy.

Labour pressed its amendment to a vote, but it was rejected by 289 to 203, a majority of 86.

An SNP amendment proposing that electrification investment which decarbonises oil and gas activities was eligible for the tax relief proposed in the Bill was also rejected by 298 to 41, majority 257.

The Bill will undergo further scrutiny in the House of Lords.