Energy (Oil and Gas) Profits Levy Bill

Debate between Simon Clarke and Stephen Flynn

2nd reading
Monday 11th July 2022 Commons Chamber

[The Chief Secretary to the Treasury (Mr Simon Clarke)]

I beg to move, That the Bill be now read a Second time.

People across the country are facing rising energy costs and an increase in the overall cost of living. Of the basket of goods and services that we use to measure inflation, a record proportion are seeing above average price increases. Indeed, the country is now experiencing the highest rate of inflation for 40 years, which is causing acute distress to the people of this country. In May the Government announced a series of measures to help the British people during this difficult time, in which 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. This is a global phenomenon that is driven by factors out of any single Government’s control, in large part resulting from Russia’s illegal war.

With increased prices at the global level, 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 temporary levy is a new 25% surcharge on the extraordinary profits. When oil and gas prices return to historically more normal levels, it will be phased out.

[Stephen Flynn (Aberdeen South) (SNP)]

I would welcome some clarity from the Minister as to what his Government regard normal prices to be, because those involved in the industry will be watching on at this moment.

[Mr Clarke]

The answer is: 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. Indeed, we could also refer to factors that predate that, back to 2019. The system has clearly been in flux, but I would certainly not want to encourage the artificially low prices of 2020 to be seen as a baseline for these purposes.

[Stephen Flynn]

I thank the Minister for giving way again. Getting investment into the industry is one of the Government’s big arguments for the tax break incentives they are providing to the industry. How can that possibly happen when they do not even say what a normal price is?

[Mr Clarke]

I will set out more about our investment incentives in a moment. We are not going to tie ourselves to a specific price level, but will obviously look towards a return to more normative market conditions—not, as I said, the artificial lows of 2020—such as the pre-crisis situation in 2019 and some of the much healthier pattern of last year, prior to what Russia has done in Ukraine, which has obviously driven prices to new highs. That gives the House a sense, but we will obviously set out our thinking well in advance of repealing the levy.

I am firmly committed to our net zero strategy.

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[Mr Clarke]

No, I will not; I am going to make some progress.

As set out in the energy security strategy, the North sea will still be a foundation of our energy security for years to come. Currently, about half our demand for gas is met through domestic supplies. In meeting net zero by 2050, we have to be realistic; we will still be using about a quarter of the gas that we use now. It is therefore necessary to incentivise investment in oil and gas, and to encourage companies to reinvest their profits to support the economy, jobs, and our energy and security, but it is possible to tax extraordinary profits fairly and to incentivise investment. That is why, within the energy profits 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% 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. This nearly doubles the tax relief available and means that the more investment a firm makes, the less tax it will pay. Unlike Labour’s windfall tax in 1997, this levy both incentivises investment and raises more revenue.

The energy profits levy contains an investment allowance that doubles the overall investment relief for oil and gas companies, unlike Labour’s proposal of a few weeks ago. Our levy raises around £5 billion over the next 12 months against Labour’s estimate of around £2 billion for its proposals. Its windfall tax would raise less than £70 per household, not £600 as it claimed. In fact, the Opposition’s regressive VAT plans would give millionaires in mansions more off their bills than those in need. They are now caveating their windfall tax costings by stating that their £600 per household support will be supported by “other measures”. By that I presume they mean more public spending and a higher rate of taxation for hard-working people across this country. As usual with Labour, the sums sadly do not add up.

The new tax we are introducing today ensures that the extraordinary and unexpected profits from which oil and gas companies have benefited are taxed fairly and provide a significant investment incentive. This is a sensible considered move and one that will be warmly welcomed across the House.

Our plans mean that the oil and gas producers can claim the allowance when their spending on investment is actually incurred. This is unlike the allowance under the existing permanent tax regime for oil and gas companies, which can be claimed only once income is received from the field, subject to the investment, and, as some Members of the House will know, that can take several years.

I want to make it clear what the investment allowance will apply to. First, if capital or operating expenditure qualifies for supplementary charge allowance, it will qualify for the energy profits levy allowance. As the levy is targeted at the extraordinary profits from oil and gas upstream activities—that is the profits that came about owing to global price increases—it makes sense that any relief for investment must also be related to oil and gas upstream activities.

Secondly, such spending can be used to decarbonise the oil and gas production, for example through electrification. Therefore, any capital expenditure on electrification, as long as it relates to specific oil-related activities within the ringfence, will qualify for the allowance.

[Stephen Flynn]

I thank the Minister for giving way once again; he is being very generous. On that specific point, the Financial Secretary to the Treasury stated the same last week. It is good to have that clarification, but why is it not written into the text of the Bill?

[Mr Clarke]

I can provide that assurance from the Dispatch Box. Examples of electrical expenditure on plant and machinery will be things such as generators, which include wind turbines, transformers and wiring. I also remind the House that there are other tax and non-tax levers to support non-oil and gas investments, such as in renewables. Those levers include the super-deduction and our competitive research and development tax credit regime. Importantly, the returns on these investments are taxed at 19% rather than at 65% as for UK oil and gas profits.

We have been listening closely to feedback from industry. Late last month, my right hon. Friend the former Chancellor met industry stakeholders in Aberdeen to discuss the levy and to make sure that it works as the Government intend it to. As my right hon. Friend the Financial Secretary to the Treasury confirmed in a debate last week, the Government have changed the legislation, which is reflected in the Bill before us today.

Tax repayments that oil and gas companies receive for petroleum revenue tax related to losses generated by decommissioning expenditure will not be taxed under the levy. These are repayments that are typically taxed under the permanent tax regime. However, as wider decommissioning expenditure is also left out of the account for the levy, this change is both consistent and fair. I wish to reiterate my thanks to those in the industry with whom we have engaged on this matter, and to again reassure the House that, with this change, the Government still expect the levy to raise around £5 billion over the next year.

On how long the levy will be in place, it will take effect from 26 May this year and, when oil and gas prices return to historically more normal levels, it will be phased out. The sunset clause in the Bill ensures that the levy is not here to stay. There are very few taxes that have their expiry date set in law, so this provision demonstrates the Government’s commitment to keeping the levy temporary and gives oil and gas companies further reassurance as they seek to plan their investments.

Our permanent oil and gas tax regime is competitive globally against similar operating environments and is lower than that of Norway, the Netherlands or Denmark. However, it is both fiscally prudent and morally right that we have a temporary and targeted levy that applies to extraordinary profits in our oil and gas sector and reflects an extraordinary global context.

Through the Bill, the levy will raise some £5 billion of revenue over the next year so that we can help families with the cost of living through significant and targeted support to millions of the most vulnerable. These are extraordinary times and we are seeing extraordinary prices, and that requires extraordinary Government action.

I did not come in to politics to raise taxes, nor did this Government, but we are about delivering the action required to support families in their time of need. At the same time, the Government are clear that we want to see the oil and gas sector reinvest its profits to support our economy, jobs and energy security. For those reasons, I commend the Bill to the House.

Oral Answers to Questions

Debate between Simon Clarke and Stephen Flynn

Tuesday 17th May 2022 Commons Chamber

[Mr Clarke]

The whole point is that that is precisely what we are not doing. We have created a West Midlands mayoralty which is channelling huge amounts of public money into supporting—[Interruption.] Sorry, the West Yorkshire mayoralty. The point stands. We have created a West Yorkshire mayoralty which is designed to drive forward growth and opportunity in that region. We have a whole programme of action, from the levelling-up fund and our wider commitments around jobs and growth, which the hon. Gentleman knows, as well as I do, will make a massive difference to the future of Bradford and the rest of West Yorkshire in the years ahead.

[Stephen Flynn (Aberdeen South) (SNP)]

The UK Government’s own website states that levelling up is a moral, social and economic programme right across Government, so can I ask the Minister where is the moral argument in people not being able to feed their kids? Where is the social argument in people not being able to heat their homes? And where on earth is the economic argument in people having no money in their pockets?

[Mr Clarke]

Levelling up is a social and moral mission. I believe very strongly that it is vital that we close the gap between the more successful parts of the UK and the rest. I represent a constituency that sits at the heart of that process. On the hon. Gentleman’s point on the cost of living, we have put together a £22 billion package of support, including a £9 billion commitment specifically on energy bills, but we are absolutely clear that we do not solve an inflationary crisis by throwing money at the problem, as that could worsen the issue we are seeking to address. The Chancellor will keep all these issues under close review. [Interruption.] I can assure the hon. Gentleman that he most certainly does. We will bring forward a programme of measures at such time that they will make the right difference in a targeted way, which, as I say, does not make worse the very problem that we all need to solve.

Budget: Pre-announcement of Provisions

Debate between Simon Clarke and Stephen Flynn

Tuesday 26th October 2021 Commons Chamber

[Mr Clarke]

I absolutely do believe that we should be accountable to the people of Newcastle upon Tyne Central. That is why I am here. It is why there will be a five-day Budget debate over the course of the days ahead. It is why my right hon. Friend the Chancellor will appear in front of a Select Committee. On the hon. Lady’s point about transport settlements, we need to unlock devolution in north-east England. My No. 1 ask of the Labour authorities in that part of the world would be to make sure that they get their act together and unlock a devolution settlement.

[Stephen Flynn (Aberdeen South) (SNP)]

As well as knowing what the Government will be doing, we also know what they intend not to do. We know that they will not be investing in carbon capture and underground storage in Scotland, and we know that they will not be match-funding the Scottish Government’s £500 million just transition fund. Yet the Treasury has raked in some £350 billion of oil revenues over the decades, so why is the Minister’s Department now turning its back on Scotland?

[Mr Clarke]

Leaving aside tired clichés about our attitude to Scotland, which I am afraid is all we ever get from SNP Members, we are of course a Government committed to the success of the whole of the United Kingdom. The Budget will contain within it many things that reflect the major benefits of the Union for Scotland just as much as for England, Wales and Northern Ireland. As a proud British citizen, I would not accept the sense of what the hon. Gentleman says. On carbon capture, utilisation and storage, the Scottish project remains the first reserve, as he will know. We intend to take this project forward, alongside a flourishing North sea oil and gas sector, offshore wind and all the things that will go together to reflect the £30 billion-worth of commitments made as part of our net zero strategy.

Oral Answers to Questions

Debate between Simon Clarke and Stephen Flynn

Monday 20th July 2020 Commons Chamber

[Stephen Flynn (Aberdeen South) (SNP)]

What recent discussions he has had with the Scottish Government on the shared prosperity fund.

[The Minister of State, Ministry of Housing, Communities and Local Government (Mr Simon Clarke)]

This Government believe in respecting the results of democratic referendums. Leaving the European Union has provided us with an opportunity to align the objective of the EU structural funds with domestic priorities, while continuing to support vital jobs and growth opportunities across the United Kingdom. The new UK shared prosperity fund will be our vehicle for delivering that. UK Government officials regularly speak to their counterparts in the devolved Administrations about this and other issues.

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[Mr Clarke]

It is obviously importantly that we provide that clarity—I wholly agree with the hon. Gentleman—and we are going to provide that clarity after the cross-government spending review in the autumn.

[Stephen Flynn]

The report highlighted by my hon. Friend the Member for Stirling (Alyn Smith) did not end its criticism there. The IFS went on to say that it was “disconcerting” that the shared prosperity fund was still not finalised and suggested that

“With limited time left, one option the government could consider would be to continue with existing EU funding allocations for one more year.”

Will the Minister today commit to do just that, to protect all our communities and ensure that they are not left behind by this incompetent UK Government?

[Mr Clarke]

Obviously, I do not accept the hon. Gentleman’s characterisation of the Government. We are working very hard to ensure that we deliver on the decision to leave the European Union. We will be in a position to give full details on the UK shared prosperity fund after the cross-government spending review, which will be so important to determining many aspects of our future relationship with Europe, as well as our commitments to our own spending priorities. We will continue working closely as one United Kingdom to understand the changing needs of local and regional economies, and I am happy to meet Ministers from the Scottish Government to find an acceptable way forward.