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Osborne’s North Sea Windfall Tax Backfires

Gas companies have warned the Treasury that they will have to raise their prices and curtail investment in Britain as a result of the windfall tax announced in the Budget, The Times can reveal.

As the Government’s bold plan to pay for lowering fuel duty threatened to backfire, Treasury officials confirmed that they are considering handing out hundreds of millions of pounds in tax breaks to energy companies. One expert said it was “policy on the hoof”, but the Treasury pointed out last night that the provision for these tax breaks was mentioned in the Budget.

Centrica, which operates British Gas, told ministers this week that plans for further investment in the Morecambe Bay gasfield could be shelved as a result of the announcement, making Britain more reliant on imports from the Middle East and Russia. Morecambe Bay supplies between 6 per cent and 10 per cent of Britain’s electricity needs.

In a further blow to George Osborne, Lord Lawson of Blaby, the former Chancellor, declares today that he is “deeply concerned” about another key announcement in the Budget, the plan to merge national insurance and income tax. Writing in The Times, he says that he examined the plan more than 20 years ago, discovered it was “a huge elephant trap” and abandoned it.

Meanwhile, Ros Altmann, director-general of Saga, has accused Mr Osborne of using the Budget as a misguided attempt to “punish” older people for past perks. But it is the threat to the credibility of the windfall tax that will worry the Chancellor most.

The Office for Budget Responsibility confirmed last night that the centrepiece of Mr Osborne’s keynote speech was only put before it at the last moment, too late for the watchdog to scrutinise the plans.

The Government denied suggestions that key officials in the Department of Energy and Climate Change, with detailed knowledge of the gas market, were not properly consulted over the measure in advance.

The Treasury denied yesterday that it was being held to ransom by gas companies or would enter into an auction over household bills, but urged Centrica to apply for the tax break if it felt that any investment projects were at risk.

A spokesman said: “There is no questions of oil and gas company exemptions [to the new tax]. As the Chancellor set out in the House in Wednesday we will consider extending targeted allowances to ensure that the North Sea remains an attractive place to invest where there is a robust business case.”

This follows days after Ofgem, the energy regulator, accused the industry of failing consumers, and comes as British households are already paying some of the highest energy bills in Europe.

A leading City energy analyst said: “To impose a tax and then days later admit you will have to give it back in tax breaks smacks of policy on the hoof. It does not seem to have been thought through.”

Some analysts believe that the Treasury has failed to appreciate that while oil companies are making a handsome profit, selling for $115 a barrel, the equivalent price for gas is only $63 and margins much smaller.

Centrica declined to comment as negotiations with the Government were continuing. Sally Fraser, a spokeswoman for Oil and Gas UK, the industry trade body, said: “We think the industry needs to meet with Government as soon as possible to resolve this issue.”

Deloitte, the accountancy firm, said yesterday that the Chancellor’s attack on the oil and gas industry could discourage further investment in British fields.

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