Are windfall taxes threatening the UK’s Net Zero Strategy?
08 March 2023
While at the start of the year Labour set out their plan to increase taxes paid by oil and gas companies should they win the next election, bodies representing the UK electricity generating sector have written to the chancellor with a plea for tax relief for capital investment in green energy.
In recent weeks there has been mounting pressure on Mr Hunt to reconsider the planned increase to the main rate of corporation tax from 19% to 25% from 1 April 2023, amid reports of stronger tax revenues than forecast, and with government borrowings in the 2022/23 year to date around £30bn less than predicted.
UK electricity generating companies, i.e. low-carbon UK electricity generators, are required to pay an Electricity Generator Levy of 45% on ‘extraordinary returns’ in addition to the main rate of tax until 31 March 2028. This compares with a combined headline tax rate of 75% for oil and gas companies following the increase to the Energy Profits Levy from 1 January 2023, but the oil and gas sector are afforded generous reliefs for certain investment expenditure in the year of spend, whereas the UK low-carbon electricity generating sector is not.
With high rates of tax comes less profitability, which has the combined impact of less cash available for reinvestment, and reduced attractiveness to outside investors.
The government’s carbon emission goal of net zero by 2050 will not be achieved without considerable investment by the energy companies to enable them to move away from fossil fuels and replace the UK’s energy requirement with green energy. If they are giving more of their profits to the treasury, putting off external investors with lower post-tax profits and retaining less of their spoils for themselves, where will the money for investment come from?
In recent weeks there has been mounting pressure on Mr Hunt to reconsider the planned increase to the main rate of corporation tax from 19% to 25% from 1 April 2023, amid reports of stronger tax revenues than forecast, and with government borrowings in the 2022/23 year to date around £30bn less than predicted.
UK electricity generating companies, i.e. low-carbon UK electricity generators, are required to pay an Electricity Generator Levy of 45% on ‘extraordinary returns’ in addition to the main rate of tax until 31 March 2028. This compares with a combined headline tax rate of 75% for oil and gas companies following the increase to the Energy Profits Levy from 1 January 2023, but the oil and gas sector are afforded generous reliefs for certain investment expenditure in the year of spend, whereas the UK low-carbon electricity generating sector is not.
With high rates of tax comes less profitability, which has the combined impact of less cash available for reinvestment, and reduced attractiveness to outside investors.
The government’s carbon emission goal of net zero by 2050 will not be achieved without considerable investment by the energy companies to enable them to move away from fossil fuels and replace the UK’s energy requirement with green energy. If they are giving more of their profits to the treasury, putting off external investors with lower post-tax profits and retaining less of their spoils for themselves, where will the money for investment come from?
