Business confidence in the UK is wavering as discussions about energy tax increases gain momentum. Concerns are mounting regarding the potential economic ramifications.
The UK government’s proposal to raise the Energy Profits Levy has sparked significant debate. Various industry leaders and organisations are warning of severe consequences.
Rising Concerns over Energy Profits Levy
The Treasury has confirmed its commitment to ongoing discussions with the oil and gas sector regarding changes to the Energy Profits Levy (EPL). An increase from 35% to 38% is scheduled for 1 November.
The EPL, targeting the profits of UK oil and gas firms, was introduced in May 2022 as a temporary measure to provide relief on household energy bills. From November, energy companies will face a total tax rate of 78% on profits.
Impact on Investment and Jobs
The UK government plans to extend the levy until 2030, tightening investment allowances. This move is expected to restrict the sector’s capacity to support economic growth.
The industry body OEUK predicts that the increased tax could generate an additional £2 billion in the short term but ultimately lead to a £12 billion loss in tax receipts. Significantly, investment is expected to plummet from £14 billion to £2 billion by 2029, jeopardising 35,000 jobs.
David Whitehouse, OEUK’s Chief Executive, criticised the approach: “This is a government that has made economic growth its main priority, and yet our analysis shows that its policy will ultimately reduce this sector’s contribution to the UK economy.”
Historical Context of the Energy Profits Levy
Introduced in response to the sharp increase in oil and gas prices, the EPL aimed to fund relief for household energy bills. The conditions that justified the levy have now changed.
OEUK argues that the continued and expanded application of the tax is no longer warranted. They stress that the initial ‘windfall conditions’ no longer exist, making the tax extension unjustified.
A Treasury spokesperson reiterated the government’s commitment to finalising changes to strengthen the windfall tax through a phased and responsible transition for the North Sea.
Business Confidence Takes a Hit
Business confidence is faltering, with tax increase discussions and stricter employment rights dampening the UK’s business environment. According to Anna Leach, Chief Economist at the Institute of Directors (IoD), the IoD’s Directors’ Economic Confidence Index saw a notable decline in August after hitting a three-year high in July.
Investment intentions have seen the steepest drop since the Covid-19 lockdowns. Revenue and headcount expectations have also diminished.
Leach called on the government to ensure that policies are designed correctly for long-term stability. She emphasized the need for a stable tax and policy framework to drive business confidence and investment.
Mixed Outlook for Private Sector
The cautious outlook extends to the broader private sector, where modest growth in activity is expected over the next three months. However, Alpesh Paleja, CBI’s Interim Deputy Chief Economist, described the overall picture as ‘very mixed’.
Consumer-facing businesses are struggling, while manufacturing momentum remains sluggish. The 30 October Budget is approaching, bringing hopes for measures to reduce costs, such as business rates reform and a clear business tax roadmap.
Paleja stated, “All this can help to deliver the return to long-term sustainable growth that the new government has promised, and firms across all sectors want to see.”
Government Response and Future Plans
The government is committed to maintaining a constructive dialogue with the oil and gas sector. Plans for a new National Wealth Fund and Great British Energy aim to create thousands of new jobs in future industries.
September discussions highlight the contrast between short-term financial gains from the EPL and the potential long-term economic impact. Policymakers are urged to consider the broader implications of their decisions.
OEUK continues to advocate for policies that promote sustained growth and investment, opposing the extended application of the EPL and calling for a focus on long-term stability.
Calls for Policy Stability
There are calls for the government to establish a clear and stable policy framework. The stability is essential for fostering business confidence and encouraging investment in the UK economy.
The proposed increase in the Energy Profits Levy has triggered widespread concern across the UK business landscape. Industry leaders warn of significant long-term economic repercussions.
Balancing short-term financial gains with the need for sustained economic growth necessitates careful consideration of policy impacts, ensuring future stability and prosperity.
