Energy and cost of living package not covered by the record increases in corporation tax revenues

HMRC recently published the corporation tax statistics for the year to March 2023 which showed that £84.7bn of corporation tax was collected in the year. This represented a steep increase of 26% on the previous year and is the highest amount ever collected in a single year. However, £2.6bn of that increase (approximately 15%) was due to the new energy profits levy (EPL), as opposed to any economic bounce-back. Despite the introduction of this new windfall tax, the cost of the energy support package is not close to being covered by the total increase in corporation tax revenues.

The EPL is a temporary levy introduced with effect from 26 May 2022, so the recent results include 10 months’ worth of EPL revenues. Companies producing oil and gas in the UK or on the UK continental shelf are liable to this new tax. It was introduced to capture a perceived windfall for the oil and gas industry arising because of the significant increase in oil and gas prices primarily as a result of the energy security issues arising following the Russian invasion of Ukraine.

According to the HM Treasury policy paper released in June 2022 the EPL was expected to raise around £5bn in the year to May 2023, which would equate to £4.2bn in the financial year for which the numbers have been published. This equates to an unreported shortfall of £1.6bn versus forecast. It is not clear what is driving the shortfall and there has been no mention of this in the corporation tax statistical analysis released by HMRC. Furthermore, the estimated cost of the energy and cost-of-living measures announced in the Autumn Statement 2022 for the financial year to 31 March 2023 was over £43bn. This is nearly half of the reported corporate tax take in that period. 

As part of the government’s drive for reinvestment within the oil and gas sector (as evidenced by the release of hundreds of new North Sea oil and gas licenses in July this year), within the levy there is also a super deduction style relief for investment in oil and gas extraction in the UK. The 80% investment allowance means that businesses will get a 91p tax saving for every £1 they invest. Perhaps the generosity of the reinvestment relief and decarbonisation allowance for these businesses have contributed to the shortfall in the EPL tax revenues. However, even if the tax take had met forecast, it would contribute to a mere 10% of the energy and cost-of-living spend.

With Rachel Reeves reiterating Labour’s intention to “levy a proper windfall tax on the huge profits the energy giants are making”, it seems likely that the government will be looking at ways to increase the tax take in order to plug the political and revenue gap associated with the EPL.