With this it will be convenient to consider the following:
Amendment 9, in clause 2, page 2, line 42, at end insert
“, which may include electrification investment that decarbonises upstream oil and gas activities”.
This amendment would put on the face of the bill that electrification investment which decarbonises upstream oil and gas activities is eligible for relief.
Clause 2 stand part.
Clauses 3 to 11 stand part.
Amendment 1, in clause 12, page 9, line 32, after “levy” insert
“and the amount of tax relief on additional expenditure treated as incurred that the responsible company is claiming under section 2 of this Bill.
(2A) The data submitted by responsible companies under subsection (2) of this section must be published in aggregate on a quarterly basis.”
This amendment requires companies making a payment of the levy to also provide information to HMRC about the amount of extra tax relief they are claiming under section 2 of the Bill, and requires the total amounts of levy received and tax reliefs claimed every quarter to be published.
Clause 12 stand part.
Clauses 13 to 19 stand part.
That schedule 1 be the First schedule to the Bill.
That schedule 2 be the Second schedule to the Bill.
New clause 1—Assessment of revenue effects of a higher Energy Profits Levy—
‘The Chancellor of the Exchequer must, no later than 30 September 2022, lay before the House of Commons an assessment of the effects on—
(a) tax revenues, and
(b) oil and gas company profits
of the Energy Profits Levy being charged at 45%.’
This new clause would require the Government to publish an assessment of the effect on tax revenues and on oil and gas company profits of charging the Energy Profits Levy at 45% rather than 25%.
New clause 2—Review of the impact of tax relief on additional expenditure treated as incurred—
‘The Chancellor of the Exchequer must, by 26 August 2023, publish an assessment of the impact of the tax relief provided by this Act on the UK’s energy market, including the impact on—
Thank you very much, Mr Chair. I open this debate by reminding the Committee of the purpose of the energy profits levy. The levy is a temporary 25% surcharge on extraordinary profits being made by the oil and gas sector as a result of the substantial rise in energy prices precipitated by the Russian invasion of Ukraine. It will help to fund the cost of living package for UK families that we announced in May. It will raise around £5 billion over the next year and will apply to companies within the ringfenced corporation tax regime. Specifically, these are companies involved in the exploration for and extraction of oil and gas in the UK and on the UK continental shelf.
The Government have been clear that they want the oil and gas sector to reinvest its profits to support the economy, jobs and UK energy security. That is why the Bill includes the 80% investment allowance. This new super deduction-style relief is being introduced to encourage firms to invest in oil and gas extraction in the UK. In future years, if oil and gas prices return to historically more normal levels, the Government will phase out the levy. However, the first clause in the Bill specifies that the levy will automatically cease to apply after 31 December 2025. I want to highlight this to the House, as it demonstrates the Government’s commitment to keep the levy temporary. Very few taxes have their expiry date set in law. Before I address the clauses and schedules in the Bill in turn, I would like to say that I have noted the amendments and new clauses tabled by Opposition Members and I will respond to them later in the debate.
Clause 1 gives the Government the ability to collect the energy profits levy. It sets the 25% rate and the levy’s main scope. The clause sets out that the levy applies to accounting periods for when the measure is in effect. It also sets the adjustments to ringfence profits for the purposes of calculating taxable profits for the levy. The levy is a tax on profits that companies are realising from oil and gas activities during what is an exceptional period. It is only fair that the measure of profit on which the EPL is charged should not be reduced by the amount of decommissioning expenditure or losses incurred from previous years. Therefore, those adjustments, which include finance costs, decommissioning costs and historic losses, are left out of account. However, the repayment of petroleum levy revenue tax arising from decommissioning is also left out of accounts. As I mentioned on Second Reading, the Government have responded to feedback from the industry in making this change. Although such repayments remain taxed under the ringfenced corporation tax and supplementary charge, they are not taxed under the levy. Another adjustment to profits is the new 80% investment allowance, which is deductible against profits.
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Clause 2 defines the investment allowance, which applies to capital expenditure incurred on oil-related activities. It also includes certain operating and leasing expenditure. The allowance will be calculated in the same way as the investment allowance for the existing supplementary charge. However, it is both more immediate and more generous, as it will be available to companies at the point of investment. It is also worth emphasising that qualifying expenditure can be used on the decarbonisation of upstream activities, including electrification.
This is important to the industry, and members of the industry—and, indeed, Members of this House, including my hon. Friend the Member for Banff and Buchan (David Duguid)—have raised it with us. Any capital expenditure on electrification, as long as it relates to specific oil-related activities within the ringfence, will therefore qualify for the allowance. This will include, for example, expenditure on plant and machinery such as generators—including wind turbines—transformers and wiring.
Clauses 3 and 4 set out the types of operating and leasing expenditure that are eligible for the investment allowance, and they are modelled on the provisions for the supplementary charge investment allowance. For operating expenditure, the expenditure must have been incurred for one of the listed purposes, such as increasing oil extraction rates or oil reserves, and must be incurred in relation to a qualifying facility or oil well. However, the allowance is not available for routine repair and maintenance. Leasing expenditure must be for leases of at least five years, and must be for mobile production or storage assets such as floating production storage and offloading ships.
The right hon. and learned Lady sent a letter to MPs saying that electrification will be covered in the offsetting, but does she agree that it should really be in the Bill? Ministers and Prime Ministers come and go, as we have seen, so the only way the industry can have full certainty and clarity is to have something in the Bill about electrification, which is the purpose of SNP amendment 9.
I have read amendment 9 and will address it in due course. In response to the hon. Gentleman’s point, that will be included in guidance. I said it at the Dispatch Box last week, and my right hon. Friend the Chief Secretary to the Treasury has also said it at the Dispatch Box, so I think that point is quite clear.
Clause 5, on the meaning of “disqualifying purposes,” is an anti-avoidance provision to ensure that expenditure is not eligible for the investment allowance if it arises because of any tax avoidance arrangements. Clause 6 ensures that additional expenditure for the investment allowance is available only for new assets, including the acquisition of an interest in an oilfield. It prevents the allowance from being generated on assets that have already been taken into account for the purposes of the levy or that would have been had the levy been in force.
Clause 7 determines when investment expenditure is incurred. For capital expenditure, it is as per the rules set out in the existing capital allowances legislation; for operating and leasing expenditure, it is the date on which it is paid. The clause also makes it clear that expenditure incurred before 26 May 2022 or after 31 December 2025 is not to be treated as expenditure incurred in an accounting period to which the levy applies.
Clauses 8 and 9 define financing and decommissioning costs and are modelled on existing legislation. Clause 10 and schedule 1 set out the loss regime within the levy. This includes group relief and the losses that companies carry back or forward under the levy, such as carrying forward losses to a future qualifying period. Clause 11 applies general corporation tax principles to the levy, which is treated for administrative purposes as an amount of corporation tax. It also prescribes the framework within which the levy will operate.
Clause 12 introduces a requirement for companies making a levy repayment to provide information about that payment to HMRC, so that receipts from the levy can be monitored. Clause 13 provides for necessary adjustments to be made if alterations are made to a company’s ringfenced profits or losses. Clause 14 introduces schedule 2, which makes consequential amendments to enactments in the light of this Bill.
I will now address the detail of the Bill’s key clauses, as well as the amendments and new clauses tabled in my name and those of my hon. and right hon. Friends.
As I set out on Second Reading, this Bill is long overdue. The Government have finally agreed to introduce a windfall tax many months after they should have done. As I noted earlier, Ministers still cannot bring themselves to say “windfall tax” in relation to these measures, so we offer them amendment 8, which would rename the Bill, as one last chance to call this new tax what it is.
It has been six months since, on 9 January, the shadow Chancellor first set out Labour’s plans for a windfall tax on oil and gas producers’ profits to help to fund a cut to people’s home energy bills. Until their U-turn in late May, Ministers were falling over each other to attack our plans. In all the time they opposed our plans, people’s energy bills and oil producers’ profits both soared. Those months of opposing our plans left the public finances missing out on billions of pounds of tax revenue. Those extra funds could have given people further help with their energy bills. Today we are giving the Government the chance to right that wrong.
Clause 1 makes it clear that the windfall tax will apply from 26 May 2022. Our new clause 3 would require the Government to recognise how much extra tax revenue would be raised if the levy instead applied from 9 January. We urge all Conservative MPs to support our amendment and apply the windfall tax from 9 January, the day the shadow Chancellor first laid out Labour’s plans for a windfall tax, rather than leaving it to start only from 26 May, the day the former Chancellor finally changed his mind.
Those extra months would raise an extra £1.9 billion for the public finances, which we would then urge the Government to put toward removing VAT on domestic energy bills for the rest of this year. We have been urging the Government to scrap VAT on this year’s domestic energy bills since last autumn. We know that a VAT cut would provide immediate help to families now. Furthermore, taking VAT off energy bills would help to push inflation downwards from its current 40-year high. Funding for this should come from applying the windfall tax from January this year, when Labour first called for it, rather than only from May, when the Government finally came round.
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Astonishingly, despite offering such a generous, unnecessary, and counterproductive tax break in this Bill, the Government still do not seem able to say how much it will cost. I note that the tax information and impact note, published just a few hours ago, gave no figures on that at all. To make sure the Government are open about the impact of this tax break, we have tabled amendment 1, which requires them to be transparent on the details of this tax relief once the levy is in place, by collecting and publishing the figures on how much it will cost. We have also tabled new clause 4, which forces the Government to do what they really should do without our needing to ask, which is coming clean now on how much they estimate this Bill’s new tax relief will cost. New clause 4 also forces them to come clean on the simple question of how much of the tax relief is estimated to be claimed in respect of investment that would have taken place anyway. As I highlighted on Second Reading, the Financial Secretary seemed clear in this Chamber on 6 June that:
“The investment relief should not be available for investments that are deadweight. It should be for new investments.”—[Official Report, 6 June 2022; Vol. 715, c. 546.]
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This new clause requires an assessment, within three months of the end of the first year of the levy being in place, of what impact the Bill’s extra tax relief for investment expenditure by oil and gas companies would have on the UK’s net zero obligations and other aspects of the energy market.
New clause 3—Review of impact of earlier start date of the levy—
‘The Chancellor of the Exchequer must, within three months of this Act receiving Royal Assent, publish an assessment of how much the levy would have raised between 9 January 2022 and 25 May 2022 if it had been in place from 9 January 2022.’
This new clause requires an assessment, within three months of the Bill becoming law, of how much extra revenue would have been raised if the levy had been introduced on 9 January 2022 rather than 26 May 2022.
New clause 4—Review of the amount of tax relief on additional expenditure treated as incurred—
‘The Chancellor of the Exchequer must, within three months of this Act receiving Royal Assent, publish an assessment of—
(a) how much tax relief on additional expenditure treated as incurred under sections 2 to 7 of this Act will be claimed; and
(b) how much of the tax relief expected to be claimed is estimated to be in respect of investment that would have taken place if the tax relief had not been in place.’
This new clause would require the Government to assess the amount of tax relief for investment expenditure introduced by this Bill expected to be claimed by oil and gas companies, and to estimate how much of this is a deadweight cost.
New clause 5—Review of the impact of limiting the scope of the tax relief on additional expenditure treated as incurred—
‘The Chancellor of the Exchequer must, within three months of this Act receiving Royal Assent, publish an assessment of the impact of making ineligible for the tax relief on additional expenditure treated as incurred any investments that—
(a) do not align with the IEA’s net zero emission scenario for a 1.5 degree temperature increase;
(b) have been announced before 26 May 2022; or
(c) are incurred by companies that have engaged in share buy-backs in the three previous financial years.’
This new clause would assess the impact of limiting the scope of the tax relief introduced by this Bill to exclude investments on the basis of their impact on climate change, whether they had already been announced, and whether the company making the investment had engaged in share buy-backs in the last three years.
New clause 6—Environmental impact of exploration activity on which levy relief is claimed—
‘The Government must undertake an environmental impact assessment in relation to any claim for relief in respect of exploration activity, which must include an assessment of whether the exploration activity is consistent with the Government’s net zero commitments.’
This new clause would require the Government to assess against its net zero commitments any investment in oil and gas exploration activity against which levy relief is claimed.
New clause 7—Regular reviews in relation to oil and gas market—
‘The Government must publish a review of the oil and gas market by 26 November 2022 and every six months thereafter during the period of the levy, which must include an assessment of—
(a) whether there is a continued need for the levy, and
(b) whether the levy should be continued in order to promote further decarbonisation of upstream oil and gas activities.’
This new clause would require a six-monthly review by the Government of the oil and gas market to assess whether the levy is still needed and whether it should continue in order to promote decarbonisation of upstream oil and gas activities.
New clause 8—Assessment of revenue from a permanent levy rate of 30%—
‘The Government must within six months of Royal Assent lay before the House of Commons an assessment of the expected change in levy revenue if the levy is set at a permanent rate of 30% so that taxation on oil and gas company profits was permanently set at 70%.’
This new clause would require the Government to produce an assessment of the amount of revenue which would be generated if the level of taxation on oil and gas company profits was permanently raised to the global average of 70%.
New clause 9—Assessment of levy revenue if investment relief not permitted—
‘The Government must within six months of Royal Assent lay before the House of Commons an assessment of the revenue that the levy would yield if no relief was permitted in respect of investment expenditure.’
This new clause would require the Government to produce an assessment of how much revenue would be generated by the Energy Profits Levy if the investment allowance were removed.
New clause 10—Assessment of investment allowance on compliance with climate change targets—
‘The Government must within six months of Royal Assent lay before the House of Commons an assessment of the impact of the levy investment allowance on compliance with the requirements of the Climate Change Act and the global agreement to limit global heating to 1.5 degrees.’
This new clause would require the Government to produce an assessment of the impact of the investment allowance on achieving Net Zero by 2050 and limiting global temperature increase to 1.5 degrees.
Just to remind everyone: as I am sitting down here, I am the Chair of the Committee and not Mr Deputy Speaker, so it is “Mr Evans”, “Chair” or “Chairman”. Anything like that will do.
Clauses 15 to 17 set out the rules for apportioning profits for accounting periods that straddle the levy’s start or sunset dates. These rules identify which profits are chargeable to the levy by treating the periods before and after the start or end date as separate accounting periods. In particular, this requires companies to apportion their receipts, expenses, assets and liabilities on a just and reasonable basis. Clauses 18 and 19 simply set out the Bill’s legal interpretation and short title in the usual manner.
This Bill delivers the energy profits levy, a 25% surcharge on the oil and gas sector’s extraordinary profits. The levy will raise around £5 billion over the next year, and it will go towards supporting people via the cost of living measures we announced in May. The Bill also provides for the new 80% investment allowance, which means that businesses will overall get a 91p tax saving for every £1 they invest. Finally, the Bill provides certainty through a sunset provision. It will therefore give businesses further reassurance that the levy is indeed temporary.
Conservative leadership hopefuls have been talking a lot over the weekend about how keen they are on tax cuts, although they and their supporters have all failed to explain how any of those would be paid for. Today, we offer them a fully funded tax cut that will help people immediately with the cost of living. Today, we are asking them to follow our plan to cut VAT on home energy bills by applying the windfall tax on oil producers from the start of the year, as should always have been the case. The principle of backdating a windfall tax is not only well established—given that the very principle of windfall taxes is to tax unexpected profits that have occurred—but is included in this Bill, which backdates the levy in its first clause.
We know that oil producers such as BP and Shell reported bumper profits in the first quarter of 2022. As drafted, however, the Government’s Bill ignores those profits entirely, as their levy will not apply until well into the second quarter of this calendar year. I realise that the Financial Secretary has said that she will not support our new clause and that the current Chancellor, a former oil industry executive, is unlikely to change his mind after coming out so firmly against a windfall tax on oil and gas producers back in January, on the grounds that those producers were “already struggling.” But given the situation in the Conservative party, I wonder whether colleagues of the Minister may feel able to think more openly about how to vote. I wonder whether any of the other Conservative leadership candidates may like to support our plan for an immediate, fully funded tax cut to help people with the cost of living and tackle inflation. Later this evening, when we vote on new clause 3, we will find out what judgment they have made.
We would also like to know what judgment those people have made about the Government’s decision to undermine the levy by shamefully giving a third or more of any money raised straight back to the oil producers through the new tax break introduced by clauses 2 to 7. This new tax break offers oil and gas producers an unprecedented subsidy for their spending on oil-related activities. As we made clear on Second Reading, for every £100 an oil and gas producer invests in the North sea, they will receive £91.25 from the taxpayer. That is an astonishing 20 times the £4.50 that companies investing in renewable energy will receive from April next year.
Any argument by Ministers that this tax break is necessary to support investment in oil-related activities has been challenged by the bosses of the oil producers themselves. BP’s chief executive told shareholders just two months ago that the company’s £18 billion investment plans were
“not somehow contingent on whether or not there is a windfall tax”.
Yet despite even oil executives questioning its worth, the Government are pushing ahead with this tax break. Our analysis has shown that that means a third or more of any revenue from the new levy could be handed straight back to oil and gas producers. That money will subsidise projects that almost certainly would have happened anyway, as there is no requirement in the Bill for investment to be additional to what was already planned, and this move stands totally at odds with the paramount need to invest in renewable energy sources.
It is critically important and urgent for us to invest in renewable energy to strengthen our energy security while bringing down people’s bills and tackling the climate crisis. We have set out Labour’s plan to do just that. Alongside insulating 19 million homes over 10 years to cut people’s bills, we would strengthen our energy security and reduce our carbon emissions by doubling our onshore wind capacity, tripling solar power, backing tidal power and nuclear power, and further investing in hydrogen. Yet the Government are today introducing a tax break that seems to fly in the face of tackling the climate crisis.
That is why we have tabled new clause 2, which would force the Government to come clean about the impact of their unnecessary tax giveaway to oil producers on our country’s net zero obligations, energy security and renewable energy supplies. This new clause also asks the Government to spell out what impact their tax break will have on fracking, given the deeply concerning reports in the media that legal advice provided to the campaigning group Uplift suggests that fracking companies would also be eligible for this tax break, based on the way the Bill has been written. I urge the Government to accept new clause 2, to make it clear what impact the tax break in the Bill will have on fracking. If the Minister refuses to do that, will she at least come clean today and confirm or deny whether this tax break could lead to public money being channelled toward dangerous, unpopular and expensive fracking projects?