Treasury accused of ‘whitewashing’ windfall tax to downplay investment risk

Energy firms argue Treasury impact assessment underplayed risk of the tax hike discouraging ‘vital investment’ in the UK

Energy companies argue there is an urgent need to invest in North Sea oil and gas and offshore wind Credit: Andy Buchanan/AFP

Treasury ministers have been accused of a “whitewash” over an official analysis claiming its windfall tax on oil and gas profits will not have a significant impact on the economy.

Energy firms said the impact assessment underplayed the risk of the tax hike discouraging “vital investment” in the UK, while one Conservative MP claimed it had been written to “promote” the measure advocated by the Treasury.

The document was signed off by Lucy Frazer, Financial Secretary to the Treasury, days after Rishi Sunak quit as chancellor.

The “energy profits levy”, which was announced by Mr Sunak in May, aims to raise revenue to help with the cost of living by introducing a temporary 25 per cent tax on UK oil and gas companies.

It has increased the effective tax rate for the industry to 65 per cent and is expected to bring in about £5 billion in its first year.

The Government had long resisted calls from Labour to impose the tax, with Boris Johnson initially claiming it would “deter” investment in new energy supply.

Deirdre Michie: ‘Sudden changes in the tax regime risk discouraging ... vital investment’ Credit: Andrew Milligan/PA

One Government source admitted: “The major issue with windfall taxes is their unpredictable nature. Businesses want certainty and a windfall tax can make a difference between a project going ahead or not.”

However, an impact assessment produced by HM Revenue and Customs for the Treasury last month suggests the levy will not hit the economy because it has been coupled with a tax relief on new investments.

The analysis stated that while tax increases can “weigh” on the economy,” the “measure is structured to incentivise the affected companies to increase their investment”.

“Overall, taking into account these counterbalancing effects, the measure is not expected to have a significant macroeconomic impact,” it said.

The conclusion has sparked claims that the wider impact of the tax on the UK’s business environment has been ignored.

Need to invest in North Sea

Deirdre Michie, chief executive of the Offshore Energies UK industry body, said there was an urgent need to invest in North Sea oil and gas and offshore wind.

“Sudden changes in the tax regime risk discouraging that vital investment, partly because they reduce profits but mostly because they damage confidence in the UK as a safe place to invest,” she said.

“The energy profits levy impact assessment said very little about these damaging potential impacts and certainly did not reflect the concern felt in our industry about the potential impact on investment and on the nation’s future energy security.”

The tone of the impact assessment stands in stark contrast to a similar analysis produced by HMRC last year on the National Insurance increase, which said the tax hike could impact “family formation, stability or breakdown” by cutting the income of individuals who were “just about managing financially”.

Craig Mackinlay: ‘This is the trouble with the current orthodoxy of the Treasury. They don’t play a game of chess. They play a move at a time’ Credit: Geoff Pugh/The Telegraph

Craig Mackinlay, chair of the Net Zero Scrutiny Group of Tory MPs, claimed the windfall analysis was a “whitewash”.

“This is the trouble with the current orthodoxy of the Treasury,” he said. “They don’t play a game of chess. They play a move at a time.

“They say, ‘oh if we put this rate up to this, or knock it down by that, this will be the tax effect’. It takes no account of behavioural differences at all.

“Companies around the world will say, ‘do you know what, Britain is not a benign place to do business anymore. It is uncertain, it’s not stable in terms of its tax regime, and if we’ve got money to spend we’ll do it elsewhere thanks very much’.”

He added: “It will have been written to support the tax measure the Treasury wanted to promote, of course it will; it wouldn’t be objective.”

A Treasury spokesman said: “Following record high oil and gas prices we introduced the energy profits levy to help fund cost-of-living support for UK families facing significant increases in their energy bills.

“The levy is designed with a generous super-deduction-style investment allowance, which is expected to lead to an overall increase in investment in oil and gas production in the North Sea.”

The row comes at a time when the energy industry is under fierce scrutiny, with firms reporting bumper profits while families’ annual bills are forecast to hit more than £3,600 this year.

In the Tory leadership race, frontrunner Liz Truss has insisted it is “not time for another windfall tax”.