Treasury accused of “laundering” tax windfall to downplay investment risks

Culzean Platform - Andy Buchanan/AFP

Culzean Platform – Andy Buchanan/AFP

Finance ministers have been accused of a “whitewash” over an official analysis which claims its windfall tax on oil and gas profits will not have a significant impact on the economy.

Energy companies said the impact assessment downplayed the risk of the tax hike discouraging “vital investment” in the UK, while a Conservative MP claimed it was written to “promote” the measure championed by the Treasury.

The document was signed by Lucy Frazer, financial secretary to the Treasury, days after Rishi Sunak quit as chancellor.

The “Energy profits levy”, announced by Mr Sunak in May, aims to raise revenue to help with the cost of living by introducing a temporary 25 per cent tax on UK oil and gas companies.

It has increased the effective tax rate for the industry to 65 per cent and is expected to bring in around £5 billion in the first year.

The government had long resisted calls from Labor to impose the tax, with Boris Johnson initially claiming it would “deter” investment in new energy supply.

Deirdre Michie - Andrew Milligan/PA

Deirdre Michie – Andrew Milligan/PA

A government source admitted: “The biggest problem with windfall taxes is their unpredictable nature. Companies want security and an unexpected tax can make the difference between a project going ahead or not.”

However, an impact assessment produced by HM Revenue and Customs for the Treasury last month suggests the levy will not hit the economy because it has been combined with a tax break on new investment.

The analysis stated that while tax increases may “weigh” the economy, “the measure is structured to motivate the affected companies to increase their investments”.

“Overall, taking into account these offsetting effects, the measure is not expected to have a significant macroeconomic impact,” it said.

The conclusion has sparked claims that the wider impact of the tax on the UK business environment has been ignored.

Need to invest in the North Sea

Deirdre Michie, chief executive of Offshore Energies UK industry body, said there was an urgent need to invest in North Sea oil and gas and offshore wind.

“Sudden changes to the tax regime risk discouraging that important investment, partly because they reduce profits, but mostly because they damage confidence in the UK as a safe place to invest,” she said.

“The impact assessment of the energy profits tax said very little about these harmful potential impacts and certainly did not reflect the concern we felt in our industry about the potential impact on investment and on the nation’s future energy security.”

The tone of the impact assessment is in stark contrast to a similar analysis produced by HMRC last year on the National Insurance increase, which said the tax increase could affect “family formation, stability or breakdown” by cutting the income of individuals who were “just trying to get by”.

Craig Mackinlay - Geoff Pugh/The Telegraph

Craig Mackinlay – Geoff Pugh/The Telegraph

Craig Mackinlay, chair of the Net Zero Scrutiny Group of Tory MPs, claimed the windfall analysis was a “whitewash”.

“This is the problem with the current orthodoxy of the treasury,” he said. “They are not playing a game of chess. They play one move at a time.

“They say, ‘oh if we put this rate up to this, or knock it down by that, this will be the tax effect’. It doesn’t take into account behavioral differences at all.

“Companies all over the world will say, ‘you know what, the UK is not a favorable place to do business anymore. It is uncertain, it is not stable in terms of the tax regime, and if we have money to spend, we will do it elsewhere, thank you very much.”

He added: “It will have been written to support the tax measure that the Treasury wanted to promote, of course it will; it would not be objective.”

A Treasury spokesman said: “Following record high oil and gas prices, we introduced the Energy Profits Levy to help fund cost-of-living support for UK families facing significant increases in their energy bills.

“The supplement is designed with a generous investment allowance in super deductions, which is expected to lead to an overall increase in investment in oil and gas production in the North Sea.”

The row comes at a time when the energy industry is under intense scrutiny, with firms reporting huge profits while the family’s annual bills are expected to reach more than £3,600 this year.

In the Tory leadership race, front-runner Liz Truss has insisted it is “not time for another tax windfall”.

Leave a Reply

Your email address will not be published.