UK windfall tax: Sunak’s tinkering will discourage investment

Soaring energy prices impoverish consumers and enrich producers. Increasing taxes on the latter to help the former has clear political appeal. But the imposition by UK chancellor Rishi Sunak of a 25 per cent tax on the “extraordinary profits” of oil and gas companies fits satirist HL Mencken’s dictum about obvious solutions: neat, plausible and wrong.

The new levy will raise a tidy sum. Taking immediate effect, it is expected to garner about £5bn over the next 12 months. Sunak tried to head off complaints about its impact on investment by pairing it with a “super-deduction” style relief. The new 80 per cent allowance rewards businesses with a 91p tax saving for every £1 they invest.

But Sunak’s assertion that the tax changes will increase investment is debatable. The super deduction will only help companies if they are in a position to take advantage of it. Their eligibility will depend on where they are in their investment cycle. Some will benefit greatly from investments they would have made anyway. Others will be unable to ramp up investment because of engineering and other complexities.

Sunak’s inclusion of a 2025 sunset clause will have unintended effects. The lack of certainty over whether the incentive will be renewed will further distort investment patterns. Blame for the boom-bust cycle of wind power investment in the US has been pinned on the on-off pattern of tax credits.

The latest changes will add extra complexity to the mish-mash of North Sea levies. These include the “ring fence” corporation tax, the supplementary charge and the zero-rated petroleum revenue tax. These are offset by investment and capital allowances. That muddle is a testimony to a tradition of tax tinkering by politicians.

North Sea exploration has become costlier, focusing on smaller fields with more complicated geology. Opposition to fossil fuel exploration from the public and politicians has increased. Meddling with the tax regime will divert investment to friendlier destinations.

Heightened concerns about energy security following the invasion of Ukraine have strengthened the case for making full use of North Sea gas reserves. Prime Minister Boris Johnson lambasted the policy fudges that have increased dependence on foreign sources as recently as April. By undermining fiscal stability and predictability, his own government has made matters worse.

The Lex team is interested in hearing more from readers. Please tell us what you think of the UK windfall tax in the comments section below

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