Energy Levy Bill passes, but MPs unhappy with generous investment allowance

MPs debated the Bill on Monday 11 July.

Second reading debate

Simon Clarke, Chief Secretary to the Treasury, opened the debate. He said the new levy would ensure “that the extraordinary and unexpected profits from which oil and gas companies have benefited are taxed fairly and provide a significant investment incentive.”

Setting the context for the new levy, the Chief Secretary said that people across the country are facing rising energy costs and an increase in the overall cost of living: “we have seen oil and gas prices reach new highs; oil prices have nearly doubled since early last year and gas prices have more than doubled… profits from oil and gas extraction in the United Kingdom 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 an energy profits levy.”

The minister said that when oil and gas prices return to ‘historically more normal’ levels, the levy will be phased out. Pressed by an SNP MP to define these more normal levels the minister said he was talking about “prices of an order that we saw prior to Russia’s invasion of Ukraine and prior to some of the inflationary pressures resulting from the covid disruption—prices more akin to those seen in 2021.” He said he would not want to encourage the artificially low prices of 2020 to be seen as a baseline for these purposes.

The minister explained that, within the levy, a new “super-deduction” style relief has been introduced to encourage firms to invest in oil and gas extraction in the UK. “We expect that the energy profits levy, with its investment allowance, will lead to an overall increase in investment. Indeed, one oil and gas company has already said that the immediate investment allowance should spark further investment in the North Sea. The new 80 per cent investment allowance will mean that, overall, businesses will get a 91p tax saving for every £1 they invest, providing them with a clear incentive to do so.”

He said any capital or operating expenditure which qualifies for supplementary charge allowance would also qualify for the energy profits levy investment allowance. Additionally, any capital expenditure on electrification, or other activity to decarbonise oil and gas production, as long as it relates to specific oil-related activities within the ringfence, will qualify for the allowance.

This levy would raise around £5 billion over the next 12 months, the Chief Secretary told MPs, against Labour’s estimate of around £2 billion for its proposals.

James Murray, Shadow Financial Secretary to the Treasury, (photographed below thanks to Parliament UK) opened the debate for Labour. He backed the Bill, was critical over timing and the investment allowance.

Calling the Bill ‘long overdue’, he said it was more than seven months since the Shadow Chancellor had first set out Labour’s plans for a windfall tax on oil and gas producers’ profits. In those seven months “cost of living pressures for people have grown relentlessly, and in those seven months, oil producers’ profits have soared.”

The shadow minister criticised the limited consultation period on the measure: “As Tax Justice UK, working with the campaign group Uplift, has said, such a short period of just one week for consultation on the draft Bill is ‘a breach of well-established legal principles of procedural fairness.’ ”

Murray said the Bill contained a loophole that had been created by design – “a brand-new tax break for oil and gas producers that will give money back to the same firms that were supposed to be paying their fair share through the windfall tax. This tax break means that oil and gas producers will receive an unprecedented level of subsidy for their spending on oil and gas-related activities. For every £100 an oil and gas producer invests in the North Sea, they will receive £91.25 from the taxpayer. That compares with £25 that companies receive for investing in renewable energy—a figure that will fall to just £4.50 from April 2023.”

He continued: “this tax break means that money that is supposed to be helping people struggling with their home energy costs will instead go back to the very oil and gas producers that have been making record profits during the energy crisis. Furthermore, that money will subsidise projects that almost certainly would have happened anyway.”

Peter Aldous (Conservative) chairs the British offshore oil and gas industry all-party parliamentary group. He argued that oil and gas extraction is ‘inextricably linked’ with emerging new lower carbon industries also taking place on the UK continental shelf, “so any levy on the oil and gas sector, if poorly thought through and poorly drafted, could have a negative impact on investment in those emerging industries”.

He welcomed the amendments and clarification that the Government have made, mentioning in particular “the exclusion of petroleum revenue tax rebates from the levy, reassurance that capital expenditure on electrification linked to oil and gas is included in the investment allowance, and the inclusion of [a] sunset clause.”

But he suggested that, to support SMEs, the Government should also introduce a small profit allowance to allow companies with small profits to be exempt from the levy. There should also be support for decarbonisation schemes to ensure that projects such as the electrification of oil and gas production facilities benefit from the capital allowance.

Stephen Flynn, for the SNP, noted the irony that “we are in the midst of a leadership contest where all we hear about is tax cuts… yet the Chief Secretary to the Treasury is in the unenviable position of coming to the Chamber to tell us that he will hike taxes to 65 per cent on the oil and gas sector… I congratulate him on being the only Conservative at this moment who appears to want to hike taxes.”

“[I]mplementing a policy that puts money into people’s pockets is necessary and we… support the principles of what the Government are seeking to do in that regard,” said Flynn. But he accused the Government of once again ‘returning to the well’ of Scotland’s North Sea oil and gas sector to raise revenue. He compared the Government unfavourably to Norway’s, which has a sovereign wealth fund from its own oil and gas sector.

The SNP spokesperson concluded: “It is clear, from looking at the situation at the moment, why the Bill is needed. The Government chose to introduce it when they did for reasons of political expediency, but we cannot allow the Bill to simply go through without attempting to improve it and I look forward to doing that at Committee stage.”

Simon Lightwood, the newly elected Labour MP for Wakefield, made his maiden speech in the debate. He spoke briefly about the Bill, accusing the Government of “seven long months of dither and delay”, before turning to the traditional paean from a new MP to his constituency.

Wera Hobhouse, for the Liberal Democrats, (photographed below thanks to Parliament UK) noted that it was her party’s leader who had been the first to suggest a windfall tax on oil and gas industry super profits. “The Government have finally caved in, but too late for many… Our Liberal Democrat analysis shows that more than double the amount could have been raised if the Government’s levy was tougher now and had been implemented earlier. The equivalent of £200 is lost to each household because the Government are doing too little too late.”

“What should we make of the proposals to exempt those companies investing in new oil and gas exploration?” asked Hobhouse. “There is nothing in the Bill to incentivise investment in renewables. That flies in the face of the Government’s commitment to get to net zero. In fact, it demonstrates once more how quickly they are prepared to U-turn on their promises, making it harder for struggling households to get on top of soaring energy bills now and in future and failing to take serious action on climate change.”

Abena Oppong-Asare, Shadow Exchequer Secretary to the Treasury, wound up the debate for Labour. She accused the Government of having been ‘all over the place’ on this issue.

The shadow minister observed that the price of electricity generated from renewable sources is linked to the price of gas, so the spike in gas prices has pushed up electricity prices, despite the costs of generating electricity from renewable sources not having changed. Her colleague James Murray had earlier noted that the explanatory notes published with the draft Bill stated that “the government will urgently evaluate the scale of these extraordinary profits and the appropriate steps to take.” Oppong-Asare accused the Government of having ‘gone quiet’ on decoupling electricity prices from the price of gas. She asked the Financial Secretary to shed some light on the Government’s plans for this area.

Financial Secretary to the Treasury Lucy Frazer wound up the debate for the Government. She responded to criticism that the Government had not listed to industry on this proposal by telling the House that, last month, the then Chancellor had held an industry roundtable which she had attended. She quoted one company, Orcadian Energy, who had said the immediate investment allowance “has transformed the attractiveness of domestic oil and gas projects for companies extracting oil and gas in the UK and it should spark further investment in the North Sea.”

In response to Labour’s questions about what the Government are doing about the electricity generation sector, the minister said this was something the Government was “urgently looking at”.

In response to Peter Aldous she said he was right to have identified the need to balance short-term measures with long-term investment. On renewables she said there were other tax levers and non-tax levers to support non-oil and gas investment, “including the super deduction and the UK’s research and development tax credit scheme. There is also the contracts for difference scheme, which provides developers of low carbon electricity generation with direct protection from volatile wholesale prices, and the £1 billion carbon capture infrastructure fund.”

The minister stressed that the levy is a temporary measure: “It is rare to include a sunset clause, but we have done so to underline that this is a temporary measure with a timeframe of 2025.”

The Bill was granted a second reading without opposition.

Committee stage

Immediately following second reading debate the House of Commons formed itself into Committee of the Whole House, spending just under two hours considering proposed amendments and new clauses to the Bill.

James Murray, for Labour, explained the thinking behind the amendments and new clauses he had tabled.

New clause 3 would have required the Government to recognise how much extra tax revenue would be raised if the levy applied from 9 January. “Those extra months would raise an extra £1.9 billion for the public finances, which we would then urge the Government to put toward removing VAT on domestic energy bills for the rest of this year.”

New clause 2 would have required an assessment, within three months of the end of the first year of the levy being in place, of what impact the Bill’s extra tax relief for investment expenditure by oil and gas companies would have on the UK’s net zero obligations and other aspects of the energy market. Murray explained that the new clause also asked the Government “to spell out what impact their tax break will have on fracking, given the deeply concerning reports in the media that legal advice provided to the campaigning group Uplift suggests that fracking companies would also be eligible for this tax break, based on the way the Bill has been written.”

Labour’s amendment 8 sought to rename the Bill to recognise that the levy is a ‘windfall tax’.

Amendment 1 sought to require companies making a payment of the levy to also provide information to HMRC about the amount of extra tax relief they are claiming under section 2 of the Bill. New clause 4 would have required the Government to assess the amount of tax relief for investment expenditure introduced by this Bill expected to be claimed by oil and gas companies, and to estimate how much of this is a deadweight cost.

The Labour spokesperson repeated Labour’s opposition to the investment allowance: “We simply do not believe this tax break is right; it undermines the windfall tax, 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. That is why we have tabled amendments 2 to 7.”

Conservative MP Craig Mackinlay, a chartered tax adviser, said he was opposed to the new levy and to the Bill: “A 65 per cent tax rate is excessive in any tax regime.”

He observed that: “We are asking the self-same companies to go all out… for more oil and gas in the North Sea at this time of energy crisis… Why have they not, thus far, explored those parts of the North Sea that we are now asking them to explore? It is because they are more complicated, deeper and more hostile environments. The profits derived from those tougher locations… will be less, as the costs are higher.”

Mackinlay noted that Finance (No. 2) Act 2017 had restricted the carry-forward of losses: “There is an allowance of £5 million, but the amount of profit that can be relieved with carried-forward losses is restricted to 50 per cent on the rest.” So, “[w]e have created a tax regime whereby we are happy to take the profits and tax them, but we are not willing appropriately to relieve the losses”.

He added that ‘profit’ was not a dirty word. “Profits pay our salaries, every salary of every civil servant, and every single pension in this country; they are all on the back of profits.” These companies are “the backbone of many blue chip investments that can be found in practically every pension fund in the land, because they are good dividend payers... By the Government taking the extra 25 per cent, those dividend flows will have to be lessened. We cannot take another 25 per cent out of a profit and expect the dividends to flow at the same rate.”

Stephen Flynn, for the SNP, proposed amendment 9 which would have put on the face of the Bill that electrification investment which decarbonises upstream oil and gas activities is eligible for relief. He notes that the House had heard ‘comforting words’ about this from two ministers, but he thought the only way to provide certainty on the electrification of grids was to put that on the face of the Bill.

The SNP’s new clause 6 would have required the Government to assess against its net zero commitments any investment in oil and gas exploration activity against which levy relief is claimed. “[W]e need to be clear about the implications of this Bill for reaching net zero,” said Flynn. “The easiest, indeed the obvious, way to do that is to ensure that those climate compatibility environmental checks take place in relation to any investments.”

The SNP’s new clause 7 would have required a six-monthly review by the Government of the oil and gas market to assess whether the levy is still needed and whether it should continue in order to promote decarbonisation of upstream oil and gas activities.

Labour MP Richard Burgon tabled new clause 1, which would have required the Government to publish an assessment of the effect on tax revenues and on oil and gas company profits of charging the Energy Profits Levy at 45 per cent rather than 25 per cent.

He explained: “The aim is to ensure that nearly all of the windfall—the undeserved, unmerited excess profit—goes to supporting families instead of boosting the profits of oil and gas giants.”

Green Party MP Caroline Lucas spoke to new clauses 8 to 10 which she had tabled.

New clause 8 would have required the Government to produce an assessment of the amount of revenue which would be generated if the level of taxation on oil and gas company profits was permanently raised to the global average of 70 per cent. Lucas said that 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; it should be a badge of shame.”

Lucas’s new clause 9 would have required the Government to produce an assessment of how much revenue would be generated by the Energy Profits Levy if the investment allowance were removed.

Her new clause 10 would have required the Government to produce an assessment of the impact of the investment allowance on achieving Net Zero by 2050 and limiting global temperature increase to 1.5 degrees.

Lucas concluded: “It is patently obvious that the Government should amend the Bill to ensure that oil and gas profits are taxed properly, but I believe fundamentally that that should pave the way for a much wider overhaul of our tax system. We need a carbon tax, which, if implemented properly with a dividend to shield low-income households, could be pivotal in driving the change we need in order to decarbonise our economy fairly.”

Financial Secretary Lucy Frazer responded to the debate.

To Craig Mackinlay she said she understood his objections, and that no Conservative wants to bring in a tax rise where it is not necessary. However these measures are “targeted and temporary”.

On Labour’s amendment 1, which would have required companies to report on how much additional tax relief they are claiming as a result of the levy’s investment allowance, the minister said companies will already be reporting the information to HMRC and figures on the amount of tax raised through the levy will be published on a periodic basis in line with other taxes.

On SNP amendment 9 she told MPs that HMRC will clarify in written guidance the allowable purposes of expenditure under the levy’s investment allowance.

Commenting on Richard Burgon’s new clause 1 and the Green new clause 8, both of which called for assessments of the impact on revenue of higher or permanent levy rates, the minister said it was not standard for the Government to publish assessments of the fiscal and economic impacts of measures that they are not introducing, and that it is not clear that doing so would be a beneficial use of public resources. This also applied to new clauses 3, 5 and 9 which similarly sought reviews or assessments of policies that the Government are not introducing.

New clauses 2, 6 and 10 would require reviews or assessments of the impact of the investment allowance on the energy market, climate change commitments and exploration activity. “The Government oppose these amendments on the basis that the Treasury already carefully considers the impact of all measures on the energy market and our climate change commitments as a matter of course,” said the minister.

Similarly, new clause 7, which would have required the Government to publish regular reviews of the oil and gas market, including assessments of the need for the levy, was unnecessary, since the Government already monitor the UK oil and gas sector, and data is published on gov.uk on a monthly and quarterly basis, she said.

On Labour’s new clause 4, which sought an estimate of how much the new investment allowance would cost, the minister said that HMRC already publishes data on the costs of non-structural reliefs, which will include the investment allowance in due course, once data is available.

MPs divided on:

• The SNP’s amendment 9, which was defeated 41-298
• Clause 2 itself – it was passed 284-202
• Labour’s new clause 3, which was defeated 289-203

The Bill passed its third reading without a vote and passed to the House of Lords.

House of Lords debate

The Lords considered all stages of the Bill on Wednesday 13 July.

The Lords minister, Baroness Penn, made similar points to her Commons counterparts, saying it was “possible to both tax extraordinary profits fairly, and to incentivise investment.”

Viscount Hanworth (Labour) recognised that the Government have provided “some very substantial investment allowances”. He concluded, “It appears that the Government envisage further investment in oil and gas extraction.” However, he continued, “the allowance will not be available for investment in alternative sources of energy, and here lies the main criticism of the legislation. To encourage investment in fossil fuels flies in the face of the commitments to staunch emissions of carbon dioxide.” He was fearful that these provisions represent the beginning of an attempt to roll back the measures to attain net-zero emissions.

Baroness Kramer (Lib Dem) had picked up a rumour that this legislation would be passed but not implemented because of the change in the Conservative Party leadership. She asked the minister to clarify the issue.

Kramer said the Lib Dems would have structured the levy differently, to ensure that the 25 per cent surcharge applied to the excess global profits of oil and gas producers headquartered in the UK, rather than just profits from their domestic activity. “Those two changes combined would have yielded the Government some £11 billion, rather than their expected £5 billion. It is a real missed opportunity at a time when ordinary people need so much help.” For those who doubt that there are excess profits flowing to oil and gas companies, she suggested they look at the share buybacks announced by the major oil and gas players.

Like Hanley, Kramer thought investment in renewables should have qualified for the super-deduction.

Lord Moynihan (Conservative) hoped the rumour Kramer had picked up, that the Bill would not be implemented, was correct. “By announcing the energy profits levy… [the Government had] almost halved the post-tax profits of the industry by increasing the marginal tax rate,” he warned. He noted that the Prime Minister had said previously that, “The disadvantage with those sorts of taxes is that they deter investment in the very things that they need to be investing in ... I don’t think they’re the right way forward”.

“The EPL is designed to disallow offsetting of historic tax losses only two years after the industry endured severe losses from the crash in commodity prices in 2020 from the Covid crisis, when the UK Government provided the industry with no tax support,” thought Moynihan.

Lord Sikka (Labour) said a 25 per cent levy was actually quite low. “The companies are collecting extraordinary profits without making extraordinary effort or taking additional risks.” He had called for a 90 per cent windfall tax.

Sikka observed that only about 5 per cent of BP’s consolidated production is based in the UK, so the 25 per cent levy will account for less than 2 per cent of its earnings before interest, taxes, depreciation and amortization. For Shell the figures are even less, he said.

He said there was profiteering “at all stages of the entire circuit of producing and selling oil, gas, petrol and electricity”. “Why is there no windfall tax on the refiners?” he asked. He suggested profiteering by banks, supermarkets, electricity generators, water and other companies justified windfall taxes on them too.

Baroness Bennett of Manor Castle, a Green Party peer, said this was “a belated, inadequate measure”. This tax applies only from 26 May, “which means the bumper profits enjoyed by companies such as BP and Shell in the first quarter of 2022 are not covered,” she added.

There is nothing extraordinary about the tax rate being temporarily introduced, said Bennett. It simply reflects, as the Institute for Fiscal Studies notes, a return to levels “broadly typical of the historical rates of North Sea taxation since the 1970s”.

She also quoted Dan Neidle of Tax Policy Associates who had said that applying the investment allowance for three years simply did not square with long-term investment planning. He had said: “Short term allowances don't incentivise investment, they just give money away.”

Lord Teverson (Lib Dem) described the Bill as ‘fiscally responsible’, contrasting it to the “zero fiscal responsibility of any sort whatever” apparent in the Conservative leadership election.

Teverson said that where we have contracts for difference, the problem of excess profits is solved. “The Treasury, through the contracts company, is doing very well at the moment, because the strike price on contracts for difference is well below the current wholesale or reference price for electricity. If we have those sorts of mechanisms—introduced by a Liberal Democrat Secretary of State for Energy and Climate Change—we solve these things automatically. I think there are ideas to apply that to the traditional power sector as well, which would indeed be interesting.”

Lord Tunnicliffe, Labour’s Treasury spokesperson in the Lords, reiterated that the super-deduction style of relief “will see an astonishing 91p returned to oil and gas producers for every pound that they invest… Those tax reliefs mean that, from next April, fossil fuel investment will be subsidised in the tax system at a rate of 20 times the investment available for renewable energy schemes.” Much of this investment was going to happen anyway, he added. 

Winding up the debate, Baroness Penn said the levy has an appropriate tax base. “[I]t is not depressed by historical losses and has an investment incentive that is not only more generous but more effectively targeted at new investment. The Government are also very careful when it comes to the retrospective application of taxes. Although this tax will apply from 26 May—the date it was announced—there needs to be careful consideration whenever the question of retrospection is raised, particularly in relation to tax.”

Responding to Lord Tunnicliffe’s statement that fossil fuel investment will be subsidised in the tax system at a rate of 20 times the incentives available to renewable energy schemes, the minister said that the Government did not recognise this figure. “Oil and gas companies within the ring-fence regime are already paying tax on their profits at more than three times the rate of other companies, so any tax relief is reducing a higher tax bill.”

Nevertheless she defended continuing to encourage investment in North Sea oil and gas. “[H]aving an element of independence of oil and gas in our energy system is important, and sourcing gas locally, through the North Sea, makes us less dependent on imports.” This does not in any way contradict the Government’s commitment to our net-zero targets, she claimed.

Expanding upon the answer given in the Commons about the electricity generation sector, the minister said the Government are continuing their work to explore whether certain parts of the sector are receiving extraordinary profits. “We are consulting with that sector both to drive forward the energy market reforms and to evaluate the scale of any potential extraordinary profits, and we are considering the appropriate steps to take.”

In response to Baroness Kramer, who had asked whether the Government will implement the levy, the minister assured peers that they will. “We expect Royal Assent to be quite swift after we finish with the Bill this evening, and the levy will come into effect not just from that point but retrospectively from 26 May.”

As a tax measure the Bill was not debated at committee stage. It passed the Lords after an hour and a half of debate and, as indicated by Baroness Penn, Royal Assent was indeed granted quickly, the Bill becoming an Act the following day, Thursday 14 July.

The parliamentary debates on the Bill can be read in full here.

By George Crozier, CIOT External Relations Manager