Energy (Oil and Gas) Profits Levy Bill

Lucy Frazer Excerpts

2nd reading
Monday 11th July 2022 Commons Chamber

[The Financial Secretary to the Treasury (Lucy Frazer)]

It is a pleasure to close this important debate on behalf of the Government. We have talked today about the context of the Bill: the high oil and gas prices, and the extraordinary profits that are being received by the industry while working people struggle with the cost of living. We are introducing a temporary, targeted levy to fund cost of living support, at the same time as encouraging companies to invest.

Let me start by responding to some of the points made by the hon. Member for Ealing North (James Murray). He criticised our levy for not raising enough, but, as was pointed out by the hon. Member for Aberdeen South (Stephen Flynn), Labour’s proposal would have raised only £1.2 billion at the time when it was made, whereas our levy will raise £5 billion—more than the £4 billion called for by Greenpeace, more than the £3.7 billion called for by the Green party, and, as I have said, significantly more than the amount proposed by the Labour party.

The hon. Member for Ealing North criticised our scheme because it will encourage investment, while the hon. Member for Erith and Thamesmead (Abena Oppong-Asare) said that we needed domestic energy security. We are ensuring that the important oil and gas sector will continue to invest so that we have that domestic energy security. The hon. Gentleman criticised us for not listening to industry, but I noted that neither of the Labour Front Benchers was able to say how or when they had engaged with industry. As Conservative Members know, last month the Chancellor held an industry roundtable which was attended by me and by the former Exchequer Secretary, my hon. Friend the Member for Faversham and Mid Kent (Helen Whately).

Let me quote some of what has been said by representatives of the industry about our investment proposal. Orcadian Energy has said:

“We believe the immediate investment allowance, included in the Energy Profits Levy, 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.”

Cornerstone Resources has said that there has been

“more interest in partnering with us”

in the last few weeks. I could go on, but what we are trying to do is raise money to help with the cost of living, at the same time as encouraging industry to invest in a vital sector.

Let me now answer some of the questions put to us by the hon. Member for Ealing North. First, I can confirm that the Chancellor supports the Bill. I also want to respond to the point about consultation. The hon. Gentleman was, of course, encouraging us to do this a long time ago, but now he says that we should have consulted for longer and, therefore, introduced the measure later. We have sought to engage, and put the industry on notice, as much as possible regarding the announcement of the levy. Ministers in my Department have been in regular contact with the industry and we also undertook a short period of technical consultation on the legislation for the levy. Hon. Members will know that draft legislation was published on 21 June, with stakeholders able to provide technical feedback on it until 28 June.

The hon. Member for Ealing North asked what we were doing about the electricity generation sector. As the former Chancellor said at the time, that is something we are urgently looking at. The hon. Gentleman said that we should follow Labour’s plan. Well, let us remember what Labour’s plan is. Labour has put forward £100 billion-worth of spending proposals, of which only £10 billion-worth are fully funded.

I would like to mention the passionate and important speech from my hon. Friend the Member for Waveney (Peter Aldous). He rightly identified the need to balance short-term measures with long-term investment, and I hope that that is what we are doing. He raised the importance of renewables. As I have had the opportunity to discuss with him before, there are 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.

My hon. Friend also asked about the timeframe. That is an important point, because this is a temporary measure. There is a sunset clause in the legislation. 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. He raised the importance of dialogue with the industry, and I reassure him that we have engaged fully with the industry and will continue to do so.

[Alan Brown]

On carbon capture infrastructure, the Minister is well aware that the Scottish cluster has been made a reserve and been let down yet again. Can she define what “reserve” means, because nobody seems to know? Does she expect one of the two selected projects to fail, at which point the reserve would step up, or is it a question of dangling a carrot in front of it? What does “reserve” really mean, and why do the Government not just make the Scottish cluster a track 1 cluster?

[Lucy Frazer]

The hon. Member makes an important point, because we value the investment and work that is going on in Scotland in the oil and gas sector and in renewables. He knows that, because I and Ministers from the Department for Business, Energy and Industrial Strategy have stood at this Dispatch Box and engaged with him regularly on this. He is right to identify that that cluster is in reserve, and I am sure these matters are being discussed with the relevant Ministers in BEIS.

I recognise the points that the hon. Member for Aberdeen South made about the sacrifices made by those who work in this sector. I am grateful to him for making those points, which I am happy to associate myself with. He asked what the normal price was, and I would like to refer him to the comments that the former Chancellor made when he was questioned on this by the Treasury Committee. He said:

“The last time this was done, a price target was published, which was $74 or $75 for Brent…If you look at average Brent price over the last five or 10 years, that will give you something like $60 or $70 for oil…so that gives you a sense.”

This is something we will be considering in due course.

[Stephen Flynn]

I was of course aware of the former Chancellor’s fluff in relation to this topic. Is the Minister confirming to the House and to the industry, which will be watching, that if the price of oil falls to around $60 or $70 a barrel, the levy will be no more?

[Lucy Frazer]

As I have just said in responding to the hon. Gentleman’s earlier point, the former Chancellor said that that “gives you a sense”, and I too am happy to relay that sense of where the prices would be, but we also have the long-stop date, which should give the industry some certainty as to when this will finally come to an end.

I welcome the hon. Member for Wakefield (Simon Lightwood) to this place. I was born and made in Leeds so I am very pleased to welcome a neighbour, in one sense of the word, and to hear him extol the virtues of Wakefield. He made a passionate speech about standing up for victims of sexual abuse and I welcome him to his place in the House of Commons.

The hon. Member for Bath (Wera Hobhouse) asked for bold and swift action, and that is what this Bill is about. Tonight this House has the opportunity to support the introduction of an energy profits levy on the extraordinary profits of UK oil and gas producers. It has the opportunity to support investment in the North sea through the levy’s investment allowance, and to support the automatic expiry of the levy in law, giving companies additional reassurance that the levy is temporary. This is a balanced approach that allows the Government to deliver support to families while encouraging investment and growth. For those reasons, I urge Members of this House to support the Bill.

Question put and agreed to.

Bill accordingly read a Second time.

Energy (Oil and Gas) Profits Levy Bill

Lucy Frazer Excerpts

Committee stage
Monday 11th July 2022 Commons Chamber

[Lucy Frazer]

Thank you very much, Mr Chair. I open this debate by reminding the Committee of the purpose of the energy profits levy. The levy is a temporary 25% surcharge on extraordinary profits being made by the oil and gas sector as a result of the substantial rise in energy prices precipitated by the Russian invasion of Ukraine. It will help to fund the cost of living package for UK families that we announced in May. It will raise around £5 billion over the next year and will apply to companies within the ringfenced corporation tax regime. Specifically, these are companies involved in the exploration for and extraction of oil and gas in the UK and on the UK continental shelf.

The Government have been clear that they want the oil and gas sector to reinvest its profits to support the economy, jobs and UK energy security. That is why the Bill includes the 80% investment allowance. This new super deduction-style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK. In future years, if oil and gas prices return to historically more normal levels, the Government will phase out the levy. However, the first clause in the Bill specifies that the levy will automatically cease to apply after 31 December 2025. I want to highlight this to the House, as it demonstrates the Government’s commitment to keep the levy temporary. Very few taxes have their expiry date set in law. Before I address the clauses and schedules in the Bill in turn, I would like to say that I have noted the amendments and new clauses tabled by Opposition Members and I will respond to them later in the debate.

Clause 1 gives the Government the ability to collect the energy profits levy. It sets the 25% rate and the levy’s main scope. The clause sets out that the levy applies to accounting periods for when the measure is in effect. It also sets the adjustments to ringfence profits for the purposes of calculating taxable profits for the levy. The levy is a tax on profits that companies are realising from oil and gas activities during what is an exceptional period. It is only fair that the measure of profit on which the EPL is charged should not be reduced by the amount of decommissioning expenditure or losses incurred from previous years. Therefore, those adjustments, which include finance costs, decommissioning costs and historic losses, are left out of account. However, the repayment of petroleum levy revenue tax arising from decommissioning is also left out of accounts. As I mentioned on Second Reading, the Government have responded to feedback from the industry in making this change. Although such repayments remain taxed under the ringfenced corporation tax and supplementary charge, they are not taxed under the levy. Another adjustment to profits is the new 80% investment allowance, which is deductible against profits.

--- Later in debate ---

[Lucy Frazer]

I have read amendment 9 and will address it in due course. In response to the hon. Gentleman’s point, that will be included in guidance. I said it at the Dispatch Box last week, and my right hon. Friend the Chief Secretary to the Treasury has also said it at the Dispatch Box, so I think that point is quite clear.

Clause 5, on the meaning of “disqualifying purposes,” is an anti-avoidance provision to ensure that expenditure is not eligible for the investment allowance if it arises because of any tax avoidance arrangements. Clause 6 ensures that additional expenditure for the investment allowance is available only for new assets, including the acquisition of an interest in an oilfield. It prevents the allowance from being generated on assets that have already been taken into account for the purposes of the levy or that would have been had the levy been in force.

Clause 7 determines when investment expenditure is incurred. For capital expenditure, it is as per the rules set out in the existing capital allowances legislation; for operating and leasing expenditure, it is the date on which it is paid. The clause also makes it clear that expenditure incurred before 26 May 2022 or after 31 December 2025 is not to be treated as expenditure incurred in an accounting period to which the levy applies.

Clauses 8 and 9 define financing and decommissioning costs and are modelled on existing legislation. Clause 10 and schedule 1 set out the loss regime within the levy. This includes group relief and the losses that companies carry back or forward under the levy, such as carrying forward losses to a future qualifying period. Clause 11 applies general corporation tax principles to the levy, which is treated for administrative purposes as an amount of corporation tax. It also prescribes the framework within which the levy will operate.

Clause 12 introduces a requirement for companies making a levy repayment to provide information about that payment to HMRC, so that receipts from the levy can be monitored. Clause 13 provides for necessary adjustments to be made if alterations are made to a company’s ringfenced profits or losses. Clause 14 introduces schedule 2, which makes consequential amendments to enactments in the light of this Bill.

Clauses 15 to 17 set out the rules for apportioning profits for accounting periods that straddle the levy’s start or sunset dates. These rules identify which profits are chargeable to the levy by treating the periods before and after the start or end date as separate accounting periods. In particular, this requires companies to apportion their receipts, expenses, assets and liabilities on a just and reasonable basis. Clauses 18 and 19 simply set out the Bill’s legal interpretation and short title in the usual manner.

This Bill delivers the energy profits levy, a 25% surcharge on the oil and gas sector’s extraordinary profits. The levy will raise around £5 billion over the next year, and it will go towards supporting people via the cost of living measures we announced in May. The Bill also provides for the new 80% investment allowance, which means that businesses will overall get a 91p tax saving for every £1 they invest. Finally, the Bill provides certainty through a sunset provision. It will therefore give businesses further reassurance that the levy is indeed temporary.

[James Murray]

I will now address the detail of the Bill’s key clauses, as well as the amendments and new clauses tabled in my name and those of my hon. and right hon. Friends.

As I set out on Second Reading, this Bill is long overdue. The Government have finally agreed to introduce a windfall tax many months after they should have done. As I noted earlier, Ministers still cannot bring themselves to say “windfall tax” in relation to these measures, so we offer them amendment 8, which would rename the Bill, as one last chance to call this new tax what it is.

It has been six months since, on 9 January, the shadow Chancellor first set out Labour’s plans for a windfall tax on oil and gas producers’ profits to help to fund a cut to people’s home energy bills. Until their U-turn in late May, Ministers were falling over each other to attack our plans. In all the time they opposed our plans, people’s energy bills and oil producers’ profits both soared. Those months of opposing our plans left the public finances missing out on billions of pounds of tax revenue. Those extra funds could have given people further help with their energy bills. Today we are giving the Government the chance to right that wrong.

Clause 1 makes it clear that the windfall tax will apply from 26 May 2022. Our new clause 3 would require the Government to recognise how much extra tax revenue would be raised if the levy instead applied from 9 January. We urge all Conservative MPs to support our amendment and apply the windfall tax from 9 January, the day the shadow Chancellor first laid out Labour’s plans for a windfall tax, rather than leaving it to start only from 26 May, the day the former Chancellor finally changed his mind.

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. We have been urging the Government to scrap VAT on this year’s domestic energy bills since last autumn. We know that a VAT cut would provide immediate help to families now. Furthermore, taking VAT off energy bills would help to push inflation downwards from its current 40-year high. Funding for this should come from applying the windfall tax from January this year, when Labour first called for it, rather than only from May, when the Government finally came round.

Conservative leadership hopefuls have been talking a lot over the weekend about how keen they are on tax cuts, although they and their supporters have all failed to explain how any of those would be paid for. Today, we offer them a fully funded tax cut that will help people immediately with the cost of living. Today, we are asking them to follow our plan to cut VAT on home energy bills by applying the windfall tax on oil producers from the start of the year, as should always have been the case. The principle of backdating a windfall tax is not only well established—given that the very principle of windfall taxes is to tax unexpected profits that have occurred—but is included in this Bill, which backdates the levy in its first clause.

We know that oil producers such as BP and Shell reported bumper profits in the first quarter of 2022. As drafted, however, the Government’s Bill ignores those profits entirely, as their levy will not apply until well into the second quarter of this calendar year. I realise that the Financial Secretary has said that she will not support our new clause and that the current Chancellor, a former oil industry executive, is unlikely to change his mind after coming out so firmly against a windfall tax on oil and gas producers back in January, on the grounds that those producers were “already struggling.” But given the situation in the Conservative party, I wonder whether colleagues of the Minister may feel able to think more openly about how to vote. I wonder whether any of the other Conservative leadership candidates may like to support our plan for an immediate, fully funded tax cut to help people with the cost of living and tackle inflation. Later this evening, when we vote on new clause 3, we will find out what judgment they have made.

We would also like to know what judgment those people have made about the Government’s decision to undermine the levy by shamefully giving a third or more of any money raised straight back to the oil producers through the new tax break introduced by clauses 2 to 7. This new tax break offers oil and gas producers an unprecedented subsidy for their spending on oil-related activities. As we made clear on Second Reading, for every £100 an oil and gas producer invests in the North sea, they will receive £91.25 from the taxpayer. That is an astonishing 20 times the £4.50 that companies investing in renewable energy will receive from April next year.

Any argument by Ministers that this tax break is necessary to support investment in oil-related activities has been challenged by the bosses of the oil producers themselves. BP’s chief executive told shareholders just two months ago that the company’s £18 billion investment plans were

“not somehow contingent on whether or not there is a windfall tax”.

Yet despite even oil executives questioning its worth, the Government are pushing ahead with this tax break. Our analysis has shown that that means a third or more of any revenue from the new levy could be handed straight back to oil and gas producers. That money will subsidise projects that almost certainly would have happened anyway, as there is no requirement in the Bill for investment to be additional to what was already planned, and this move stands totally at odds with the paramount need to invest in renewable energy sources.

It is critically important and urgent for us to invest in renewable energy to strengthen our energy security while bringing down people’s bills and tackling the climate crisis. We have set out Labour’s plan to do just that. Alongside insulating 19 million homes over 10 years to cut people’s bills, we would strengthen our energy security and reduce our carbon emissions by doubling our onshore wind capacity, tripling solar power, backing tidal power and nuclear power, and further investing in hydrogen. Yet the Government are today introducing a tax break that seems to fly in the face of tackling the climate crisis.

That is why we have tabled new clause 2, which would force the Government to come clean about the impact of their unnecessary tax giveaway to oil producers on our country’s net zero obligations, energy security and renewable energy supplies. This new clause also asks 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. I urge the Government to accept new clause 2, to make it clear what impact the tax break in the Bill will have on fracking. If the Minister refuses to do that, will she at least come clean today and confirm or deny whether this tax break could lead to public money being channelled toward dangerous, unpopular and expensive fracking projects?

--- Later in debate ---

[Caroline Lucas]

The hon. Gentleman puts it perfectly succinctly and I very much agree.

It has been estimated that existing decommissioning relief deeds could enable the extraction of the equivalent of 1.7 billion barrels of oil that otherwise would have remained unextracted, and that will only increase if we continue with the vicious cycle of handsomely subsidising fossil fuel companies to exploit oil and gas reserves. In response to the Glasgow Climate Pact’s call for parties to

“phase out inefficient fossil fuel subsidies”,

the Climate Change Committee said that the Treasury should initiate a review of the role of tax policy in delivering net zero, and was very clear that no fossil fuel subsidy should be considered efficient in the UK. Will the new Chancellor now commit to that review, listen to his own Climate Change Committee, and take its advice?

New clause 10 would require the Government to produce an assessment of the impact of the investment allowance on achieving net zero and on limiting the global temperature increase to 1.5°. It is frankly astounding that the Government need to be reminded yet again that the IEA has been clear that limiting global temperatures to 1.5° necessitates

“no new oil and gas fields approved for development”

as from last year. Yet according to the United Nations Environment Programme, the level of fossil fuel production planned and projected worldwide by Governments in 2030 is more than twice the levels consistent with that goal. The UK has given North sea oil and gas companies almost £14 billion in subsidies since signing the Paris agreement in 2015 alone. This Bill was an opportunity for the Government to change course, but instead they have chosen to double down and to play with fire by bringing forward a Bill that is plainly incompatible with a safe future.

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. That tax—it has long been Green party policy—would target the big polluters such as oil and gas companies. It is estimated that, starting at a rate of about £100 per tonne of CO₂, it could generate up to £80 billion to fund the transformation necessary to achieve our climate goals. That is the kind of innovative policy we need right now to save ourselves from the climate emergency that is only growing deeper.

[Lucy Frazer]

Many of the points that have been raised in Committee were considered on Second Reading, but I would like to touch on a few of them and then deal with amendments.

The hon. Member for Ealing North (James Murray) asked how the new investment allowance works. On 6 June, I said I was very happy to look further at this point, and I can reassure him that the investment allowance within the levy will be generated on investment expenditure —that is, capital expenditure and some operating and leasing expenditure—incurred on or after 26 May. The legislation includes an anti-avoidance provision to prevent any recycling of existing assets from getting the allowance, and that is all very clearly set out in clause 6.

I want to deal with some of the points made by my hon. Friend the Member for South Thanet (Craig Mackinlay), because I understand his objections, and no Conservative wants to bring in a tax rise where it is not necessary. I have had the opportunity to talk to him on a number of occasions about these measures, and he will know that they are targeted and temporary. He says he fears for investment coming through, but of course that will be assessed by the OBR in due course. I am not sure whether he was in the Chamber earlier when I quoted some companies that have said that they will be investing and that this encourages investment, but I will mention a further one. Kistos has said that it is

“assessing opportunities in the UK that would enable us to take full advantage of the investment allowances implicit in the recently introduced UK Energy Profits Levy”.

I turn to the amendments. Amendment 1 would require companies to report on how much additional tax relief they are claiming as a result of the levy’s investment allowance, in addition to the existing requirement to report how much levy is payable. The amendment would also require that data to be published on a quarterly basis. Companies will already be reporting the information to HMRC that allows it to ensure appropriate compliance with the law, and figures on the amount of tax raised through the levy will also be published on a periodic basis in line with other taxes. As a result, this amendment should not be made to the Bill.

Amendment 9 would add clarification to the allowable purposes of expenditure under the levy’s investment allowance. I have already dealt with that point on Second Reading, and I confirm to the Committee that HMRC will clarify this in written guidance.

New clause 1 calls for an assessment of the impact on revenue and on oil and gas companies’ profits of a 45% levy rate. Similarly, new clause 8 calls for assessments of the revenue impact of a permanent 30% levy rate, which would bring the permanent headline rate of tax for oil and gas companies in ringfence corporation tax to 70%. However, it is not standard—I will be saying this in relation to a number of new clauses—for the Government to publish assessments of the fiscal and economic impacts of measures that they are not introducing, and it is not clear that doing so would be a beneficial use of public resources. Therefore, I recommend that the Committee rejects these new clauses.

Again, new clauses 3, 5 and 9 would require reviews or assessments of policies that the Government are not introducing. New clause 3 would require a review of the revenue that would have been raised had the levy taken place from early January. I set out on Second Reading why we did not bring forward this measure earlier, and I did so last week as well. We are not supporting these measures because, as I have said, it is not usual to bring forward public assessments of measures that we 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.

New clause 4 would require a review of the amount of investment allowance that will be claimed and how it relates to expenditure that would have happened were the investment allowance not in place. The first point to reiterate here is that the Government expect the combination of the 25% levy and the 80% investment allowance to lead to an overall increase in investment, and the OBR will take account of this policy in the next forecast. HMRC already publishes data on the costs of non-structural reliefs, which will include the investment allowance in due course, once data is available.

Finally, new clause 7 would require the Government to publish regular reviews of the oil and gas market, including assessments of the need for the levy and whether it should be continued to promote further decarbonisation of upstream oil and gas activities. That is also 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.

For all the reasons I have set out, I urge Members to reject all the amendments and new clauses. I commend the clauses and schedules to the Committee.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clause 2

Additional expenditure treated as incurred for purposes of section 1

Amendment proposed: 9, page 2, line 42, at end insert

“, which may include electrification investment that decarbonises upstream oil and gas activities”.—(Stephen Flynn.)

This amendment would put on the face of the bill that electrification investment which decarbonises upstream oil and gas activities is eligible for relief.

Question put, That the amendment be made.