Government backs down - a bit - on North Sea windfall tax

The Treasury has bowed to pressure from the industry, by offering a tax break to smaller companies. But is it enough?

by Emma Haslett
Last Updated: 21 Dec 2012
A few months ago, Office for Budget Responsibility chief Robert Chote insisted the Government’s £2bn windfall tax on North Sea oil producers wouldn’t have any ‘significant’ effect on investment. But it seems oil companies’ ongoing complaints and threats to up sticks have finally had some effect: after months of lobbying (not to mention the closure of three high-profile projects), it has decided to introduce a new concession for smaller-scale producers – who are already reaping the rewards…

During the Budget, the Chancellor announced that he would be raising the supplementary tax charged to oil companies on top of corporation tax from 20% to 32% - the idea being to offset rising petrol prices for motorists. This new concession is fairly complex, but means something called the ring-fence expenditure supplement will rise from 6% to 10%. Basically, that means smaller oil companies which are investing a lot into infrastructure and exploration will be able to write off more of their losses against tax – thus improving the economic argument for investing.

The move has already produced on headline-friendly result: Norwegian firm Statoil has already reversed its decision to cancel a £6bn exploration project in the Mariner field off the coast of Shetland – although there are some questions as to why such a big player will benefit from a tax break designed for small oil explorers. (The other high-profile producer to have ceased operations as a result of the tax, Centrica, also got back to work on its abandoned South Morecambe field last Friday, but apparently that’s entirely coincidental). Oil & Gas UK CEO Malcolm Webb seems relatively happy, as well, saying that ‘this is a first step in the right direction’. (Presumably he hopes it won’t be the last.)

But what about the effect on the public finances? The windfall tax was originally created to offset losses the Treasury was expecting to make from a cut in fuel duty it had also announced as part of the Budget. According to its figures, this concession’s going to cost it an extra £50m. This might not sound a lot, in the context of the £294bn of tax the industry has apparently paid over the past decade – but it’s still a lot of petrol tanks’ worth.

Then again, if tax hikes actually end up reducing the tax take, because of their effect on investment and growth, it makes no sense to press ahead with them regardless. And since the industry supports some 40,000 jobs, the Government can’t afford to hammer it too hard – particularly in light of yesterday’s Bombardier PR disaster.

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