Taxation of North Sea oil and gas

What taxes are paid on North Sea oil and gas?

Companies operating in the North Sea pay four separate profit-related taxes on oil and gas production: ring fence corporation tax, supplementary charge, petroleum revenue tax (PRT), and the energy profits levy. Total receipts from these taxes are forecast to be £3.8 billion in 2024/25.

Ring fence corporation tax, supplementary charge and PRT are long-standing components of the North Sea fiscal regime, while the energy profits levy was introduced in May 2022.

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 £0.5 billion in 2020/21. As a percentage of national income (GDP), receipts fell from 0.67% of GDP to 0.02% of GDP over this period. The Office of Budget Responsibility (OBR) note that this fall in receipts was largely 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 rose strongly in 2022, following Russia’s full-scale invasion of Ukraine. In turn UK oil and gas tax revenues rose from £2.6 billion in 2021/22 to £9.9 billion in 2022/23.

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 these extra tax receipts would fund three changes to the taxation of road fuels:
  • 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 stated 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 Mr Osborne announced a number of changes following reductions 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 the 2015 Budget four months later, including a cut in the supplementary charge to 20%, backdated to January 2015, and a reduction in the rate of PRT, from 50% to 35%, from 1 January 2016. In the 2016 Budget he announced that the supplementary charge would be set at 10%, and the rate of PRT 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?

In the weeks following Russia’s full-scale invasion of Ukraine in February 2022, and the associated rise in both world oil prices and energy company profits, there was considerable speculation that the Government would introduce a one-off ‘windfall tax’. On 26 May the then Chancellor Rishi Sunak gave a statement to the House of Commons, announcing a new energy profits levy, charged on oil and gas profits at a rate of 25%. The levy would apply to 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 Government estimated the Levy would raise around £5 billion in its first 12 months.

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

Following the Chancellor’s statement, the Government introduced the Energy (Oil and Gas) Profits Levy Act 2022 to implement the new tax. The Library briefing on this legislation provides further background.

What further reforms have been made to oil and gas taxes?

The energy profits levy: rate and lifetime

In the 2022 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. In addition, the lifetime of the levy would be extended for a further two years to 31 March 2028. Statutory provision for these changes was made by Finance Act 2023 (specifically sections 1-3 of the Act).

In June 2023 the Government announced that it would introduce a provision to cut the tax rate for oil and gas companies to 40%, the rate before the energy profits levy was introduced, if prices fell to historically normal levels for a sustained period. Following a consultation exercise, in the 2023 Autumn Statement the Government confirmed its plans to introduce the Energy Security Investment Mechanism (ESIM).

In the 2024 Spring Budget on 6 March 2024 the Chancellor announced that the end date for the energy profits levy would be extended one year to 31 March 2029. Statutory provision for this is to made in a future Finance Bill. Legislation to establish the ESIM is included in the Finance (No.2) Bill 2023-24 which was introduced after the Budget (specifically clause 19 of the Bill).

The electricity generator levy

In the 2022 Autumn Statement Chancellor Jeremy Hunt announced the introduction of the energy generator levy: a new temporary 45% levy on electricity generators to apply from 1 January 2023. The scope of the levy is restricted to returns above a set benchmark price for electricity, unlike the energy profits levy which applies to all profits. Statutory provision for the new levy was made by Finance (No.2) Act 2023 (specifically part 5 of the Act).

How much money are these taxes forecast to raise in future years?

The OBR  has forecast that taken together receipts from offshore corporation tax, petroleum revenue tax and the energy profits levy will raise £6.2 billion in 2023/24. Receipts are forecast to fall in future years to £2.2 billion by 2028/29 as energy prices and production decline.

The OBR has forecast that the energy generator levy will raise £1.3 billion in 2023/24. Based on current expected prices the OBR forecast that receipts will fall to zero in 2027/28, as by this date generators’ selling prices are forecast to have fallen below the benchmark price.

Further reading

HM Revenue & Customs (HMRC) 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 the 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. The Library briefing, The Windfall Tax, published in 2004, discusses both taxes.