Currently, the oil and gas sector pays a 40-percent headline rate tax on profits, making it among the UK's most highly-taxed industries. The new levy takes the combined rate of tax on profits to 65 percent, according to Offshore Energies UK.
LONDON, May 26 (Xinhua) -- Britain announced Thursday it will impose a 25-percent levy on the profits of oil and gas companies, to ease the financial burden on millions of households amid raging inflation.
As a temporary policy, the tax would be phased out "when oil and gas prices return to historically more normal levels," with a sunset clause written into the legislation, the country's Chancellor of the Exchequer Rishi Sunak told the House of Commons.
The levy was first proposed by the opposition Labour party, but the government did not express much support for it. However, Sunak has said on several occasions that nothing was off the table in the face of the worsening cost-of-living crisis.
Opposition to the policy tool was mainly based on a popular idea that it would crimp investment. Deirdre Michie, chief executive of Offshore Energies UK, an association representing 400 companies in the offshore oil, wind and gas sector, said Wednesday that the tax will deter investors.
"This is an industry that thinks and plans long-term, meaning years and decades, so sudden new costs, like this proposed tax, will disrupt planning and investment and above all undermine investor confidence," Michie said.
Currently, the oil and gas sector pays a 40-percent headline rate tax on profits, making it among the UK's most highly-taxed industries. The new levy takes the combined rate of tax on profits to 65 percent, according to the association.
Sunak said on Thursday the levy "will encourage investment, not deter it." He added that the government is doubling overall investment relief for oil and gas companies, which means that "for every one (British) pound a company invests, they'll get back 90 percent in tax relief."
This change in attitude came after some energy giants posted bumper earnings, as global energy prices soared. BP reported in early May that its underlying profit for the first quarter of this year had seen a huge increase, to 6.2 billion U.S. dollars from 2.6 billion dollars, during the first three months of 2021.
The extraordinary profits being made by the oil and gas sector are not "the result of recent changes to risk taking or innovation or efficiency, but as the result of surging global commodity prices," Sunak underlined.
The levy should raise around five billion pounds in revenue over the next year "so that we can help families with the cost of living," without having to increase the government's debt burden, Sunak said.
The government will send a one-off payment of 650 pounds directly to around 8 million of the lowest income households in July and in the autumn, which is worth over 5 billion pounds in total.
From the autumn, Sunak added, the government will send an extra, one-off payment of 300 pounds to more than 8 million pensioners to help pay for heating costs.
Six million people who receive non-means-tested disability benefits will also receive an extra, one-off payment worth 150 pounds from September.
In recent months, British consumers have seen the highest price rises in decades. Since inflation rose by 9.0 percent in the 12 months to April 2022, up from 7.0 percent in March, the Bank of England expects it to rise further to average at slightly over 10 percent at its peak by the end of this year.
Inflation has hit the lower-paid groups disproportionately, and is significantly higher for the poorest tenth of households than for the richest tenth. This is because lower income households spend a greater share of their family budgets on energy bills, which are rising sharply, according to the think tank Resolution Foundation.
Although Sunak's measures were welcomed by some experts, Paul Dales, chief economist at London-based consultancy Capital Economics, expressed concerns that they will add to the already extensive inflationary pressure.
"This loosening in fiscal policy means that to bring inflation back down to the 2 percent target, monetary policy will need to be tighter," Dales added.