The UK Offshore Energy Authority has warned that a windfall tax increase on UK oil and gas companies could undermine the government’s goal of boosting economic growth. The group warned that the planned tax increase could depress investment, costing the UK economy £13bn between 2025 and 2029 and putting 35,000 jobs at risk.
The Treasury responded by reiterating its commitment to “constructive dialogue” with the oil and gas industry over proposed changes to the Energy Profits Tax (EPL), the formal name for the windfall profits tax. The EPL is set to rise from 35% to 38% on 1 November, and targets the profits of UK oil and gas companies, which already face a unique tax structure with a 30% corporation tax rate and a 10% supplementary rate. This means that from November, UK energy companies will be subject to a combined tax rate of 78% on profits.
The government also plans to extend the tax until 2030 and tighten investment allowances, which have previously allowed companies to reduce their tax burdens by investing in North Sea projects, including green energy initiatives. Oyuk argues that these changes would reduce the sector’s ability to support economic growth, a key priority for the government.
OEUK analysis suggests that while the tax hike could generate an extra £2bn in the short term, it would ultimately result in a £12bn loss in tax revenue. The industry body also predicts a sharp fall in investment, from £14bn under current policies to just £2bn by 2029, putting 35,000 jobs at risk in the same year as projects stall.
David Whitehouse, chief executive of the Confederation of British Industry, criticised the government’s approach, saying: “This is a government that has made economic growth its main priority and yet our analysis shows that its policy will ultimately reduce the sector’s contribution to the UK economy.”
The energy tax was introduced in May 2022 in response to rising oil and gas prices, and was designed as a temporary measure to finance relief for household energy bills. Oyuk claims that the initial “windfall conditions” no longer exist, making the extension and expansion of the tax unjustified.
A Treasury spokesperson reiterated the government’s position, saying: “We are committed to maintaining a constructive dialogue with the oil and gas sector to deliver on the changes to the windfall tax and ensure a gradual and responsible transition for the North Sea. Our plans for a new National Wealth Fund and Great British Energy will create thousands of new jobs in the industries of the future.”
Meanwhile, business confidence is falling as talk of tax rises and tougher employment rights intensifies, according to Anna Leech, chief economist at the Institute of Directors. After hitting a three-year high in July, the IOD’s economic confidence index fell sharply in August. Investment intentions saw their biggest drop since the start of the Covid-19 lockdowns, with revenue expectations and headcount also falling.
“We call on the government to take the time to design the right long-term policies, and provide the stable tax and policy framework needed to boost business confidence and investment,” Leitch said.
Adding to the cautious outlook, the CBI’s Growth Index survey showed private sector firms expect modest growth in activity in the three months to November. However, Alpesh Baliga, interim deputy chief economist at the CBI, described the overall picture as “very mixed,” with consumer-facing businesses struggling and manufacturing momentum remaining sluggish.
With the budget due on October 30, Baliga called for cost-cutting measures, such as a long-awaited business rates reform and a clear roadmap for business taxes to attract investment. “All of this will help deliver the return to long-term sustainable growth that the new government has promised and that businesses across all sectors want to see,” he said.