Business confidence in the UK is on shaky ground as discussions around increasing the Energy Profits Levy (EPL) intensify.
The proposed tax changes, intended to extract more revenue from oil and gas firms, have led to significant unease within the industry, raising fears of reduced investment and job losses.
Government Plans for Energy Profits Levy Revisions
The UK Treasury has reaffirmed its dedication to maintaining a ‘constructive dialogue’ with the oil and gas industry regarding upcoming changes to the Energy Profits Levy (EPL). Slated to increase from 35% to 38% on 1 November, the EPL specifically targets the profits of UK-based oil and gas companies. These companies already operate under a unique tax structure comprising a 30% corporation tax and an additional 10% supplementary rate.
From November, these companies will face a total tax rate of 78% on their profits. The government intends to extend the levy until 2030 while tightening investment allowances that previously enabled firms to reduce their tax burden through investments in North Sea projects, including green energy initiatives. OEUK, an industry body, argues that such changes will diminish the sector’s ability to support economic growth.
Economic Impact and Industry Response
OEUK estimates that the higher tax rate could generate an additional £2 billion in the short term but ultimately lead to a £12 billion loss in tax receipts. Investment is projected to plummet from £14 billion under current policies to just £2 billion by 2029, jeopardising 35,000 jobs in the process. David Whitehouse, OEUK’s Chief Executive, expressed strong criticism: ‘This is a government that has made economic growth its main priority, and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy.’
Introduced in May 2022, the EPL was initially a temporary measure aimed at funding household energy bill relief during a period of high oil and gas prices. OEUK contends that these ‘windfall conditions’ no longer exist, making the proposed extension and expansion of the tax unjustifiable.
Government’s Long-term Vision
A Treasury spokesperson reiterated the government’s commitment to working with the oil and gas sector to finalise changes that will strengthen the windfall tax while ensuring a phased and responsible transition for the North Sea industry. Plans for a new National Wealth Fund and Great British Energy are expected to create thousands of new jobs in future industries.
While business confidence is waning amid talks of tax increases and stricter employment rights, according to Anna Leach, Chief Economist at the Institute of Directors (IoD), the IoD’s Directors’ Economic Confidence Index sharply declined in August. Investment intentions have dropped significantly, accompanied by reduced revenue and headcount expectations.
Broader Economic Indicators
Adding to the atmosphere of caution, the CBI Growth Indicator survey revealed that private sector firms expect only modest growth in activity in the upcoming months leading to November. Alpesh Paleja, CBI’s Interim Deputy Chief Economist, described the overall economic climate as ‘very mixed,’ noting that consumer-facing businesses are struggling while manufacturing momentum remains weak.
The upcoming 30 October Budget is highly anticipated, with Paleja calling for measures to cut costs, such as business rates reform, and the establishment of a clear business tax roadmap to attract investment. ‘All this can help deliver the return to long-term sustainable growth that firms across all sectors want to see,’ he added.
OEUK’s Stance and Government Rebuttal
OEUK urges the government to reconsider its approach, emphasising that the extension and intensification of the EPL will have far-reaching negative consequences for the sector and the broader economy. They recommend a stable tax and policy framework to boost business confidence and investment.
In contrast, the Treasury maintains that its policies are designed to balance immediate fiscal needs with long-term economic stability. The Treasury argues that the new measures will ensure that the North Sea sector contributes its fair share to the economy, while long-term initiatives like the National Wealth Fund will mitigate any adverse impacts.
Impact on Investment and Employment
Investment in the sector is expected to fall sharply, from £14 billion to £2 billion by 2029, according to OEUK projections. This will put approximately 35,000 jobs at risk, primarily due to halted projects. The industry argues that such a significant reduction in investment will hamper economic growth and reduce the sector’s contribution to the economy.
The upcoming changes will also tighten investment allowances, a move expected to discourage companies from investing in new projects, including those focused on green energy. This will have broader implications for the UK’s energy transition goals.
Calls for a Balanced Approach
Institute of Directors and CBI have both called for a more balanced approach to tax policy to ensure long-term, sustainable growth. ‘We are calling on the government to take time to get policy design right for the long-term,’ said Leach.
The business community remains hopeful that the upcoming budget will address these concerns, fostering a more stable and predictable environment for businesses of all sizes.
The impending changes to the Energy Profits Levy have sparked significant debate, underlining the complex balance between immediate fiscal needs and long-term economic growth. The government’s commitment to dialogue with the oil and gas sector will be crucial in navigating these challenges.
As the 30 October Budget approaches, all eyes are on the government to deliver measures that will maintain business confidence and investment, ensuring a stable pathway towards sustainable growth.
