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The windfall tax is officially known as the ‘Energy Profits Levy’, and was first introduced in May 2022 as a result of huge increases in profits for the oil and gas industries in the UK. In the recent Budget, Chancellor Jeremy Hunt has announced the government’s intention to extend the tax (meant to be a temporary one) further – it will now run until March 2029.
The tax was originally set at 25% by Rishi Sunak as Chancellor – it was raised to 35% in January of this year.
The huge profits which the tax was introduced upon initially arose as a result of a number of factors. First, the Russian invasion of Ukraine led to complex geopolitical sanctions coming into place, limiting the available supply of oil and gas throughout the world. As a result of this scarcity, the price of oil and gas essentially skyrocketed.
On top of this, demand for energy rose significantly post-Covid, leading to further profits for energy companies. Other factors include rising inflation in related sectors.
This levy applies to any profits which companies make from extracting oil and gas in territories controlled by the UK. In practice, this mostly means the extraction projects taking place in the North Sea (the body of water just east of Northern England/Scotland, moving towards Norway and Denmark) – for example huge oil rig operations in that area, which generate millions of pounds each year.
In terms of specific companies, you’re looking mainly at big name brands like BP and Shell. Both companies are making annual profits into the tens of billions (BP reached $13.8 billion in 2023, while Shell made $28.2 billion). Both of these numbers are down from record profits in 2022, although both are still in an incredibly strong position.
The tax has been extended mostly due to the fact that profits have remained high (largely due to the fact that the Russian invasion of Ukraine is still ongoing, and so prices still remain high). This is the primary reason given by Jeremy Hunt in public addresses.
In terms of an end date, the windfall tax will cease to exist once oil and gas prices fall (and remain at that low point for at least six months). The ‘low point’ in question is roughly £55.67 per barrel for oil and 54p per therm (the non-standardised and rather complex gas-specific measurement) for gas. To put that into perspective, currently (in mid-March 2024) a barrel of oil is worth around £63.93, and a therm of gas costs around 62p.
The energy profits levy is not the only tax placed upon these companies. 30% corporation tax applies to their profits by default, then a further 10% is taken away in this specific context.
However, the practical reality is quite different. These companies often end up paying an almost negligible amount of tax in practice via some clever accounting and legal work – e.g. offsetting their profits against losses or spending, which significantly cuts the amount they actually pay to HMRC in the end. Furthermore, the government offers significant tax benefits for investment in this area (and even more specifically in ‘green energy’ initiatives like decarbonisation).
The extension of the windfall tax (or indeed, its very existence in the first place) can serve as an excellent talking point in application forms or at interview stages later on. This is true for anyone applying for legal opportunities (be that vacation schemes, training contracts, pupillage, etc) at any law firms or chambers which practice in this area (or related areas to it, given its broad coverage).
Amongst law firms, you might consider which ones are particularly active in the oil and gas industries – Chambers and Partners currently awards Band 1 spots to Magic Circle firms like Allen & Overy and elite US firms like White & Case.
There are a number of legal issues which arise when discussing this story from a number of different angles – which can be best thought of in terms of practice areas.
Energy and Infrastructure is the most obvious practice area tied up in these developments. Specialist knowledge of how these industries work is often a major selling point for applicants, as the process can be rather technical at times. As part of this work, you may also benefit from being able to discuss a Renewables angle on these issues – especially given the fact that law firms are being increasingly held to account in terms of their sustainability and involvement with fossil fuel emissions. If advising BP on what these changes mean for them, you might be considering whether shifting to decarbonisation in certain areas makes more financial (as well as moral) sense.
Tax is of course heavily involved here too. Many large law firms will maintain sizeable tax-specialist teams who are experts on the relationship between large corporations and HMRC. This includes how to limit the amount of taxes these companies end up paying through exploiting clever loopholes – see above for how this has played out in practice already.
Another area of consideration here could be Public Law – especially when considering the fact that this is essentially government interventionism on a corporate matter. Some companies will sometimes attempt to ‘bite back’ by challenging the validity of increased taxes and the like through processes like judicial review (as many law students, whether at undergraduate or PGDL level, will be familiar with).
Of course, amidst all of the legal issues at play here, there are ethical considerations to discuss too. On a personal level you need to be questioning what kind of work (and therefore which kind of firm) you are personally happy to be involved in. From a law firm’s perspective, how is its public image impacted by engaging in this kind of work? From a business development perspective, ESG credentials are becoming increasingly central to the conversation.
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