Labour has renewed its call for a windfall tax on the UK oil and gas industry after Shell revealed it paid no tax on its North Sea production last year.
Tax refunds related to the decommissioning of old oil platforms meant that rather than paying tax on its upstream operations, Shell attracted a rebate of $121million (£92.6million) on previously overpaid taxes.
The payment, disclosed publicly by Shell yesterday, led to renewed calls for a windfall tax when high oil and gas prices are causing hardship for consumers.
Ed Miliband, Labour’s shadow secretary for climate change, said: “The fact that Shell is receiving millions from the taxpayer whilst enjoying near record profits of almost $20billion last year makes it clearer than ever that they should be required by the government to pay their fair share.”
Shell said the tax rebate disclosed in its 2021 “payments to governments” report yesterday related to business activity carried out in 2020, when oil prices crashed during the pandemic.
Decommissioning reliefs explained
Ed Milibands assertion that Shell is receiving millions from the taxpayer is misleading.
The UK tax regime means that oil companies can deduct the sums they spend dismantling old infrastructure from their taxable profits, which leads to a tax refund if the decommissioning costs exceed their profits that year.
Currently oil and gas fields are ‘ring fenced’ for tax purposes and as such effectively operate as individual profit and loss centres. Each field therefore has its own ‘tax account’ within the tax system.
Owing to the fact that decommissioning tax reliefs can only be claimed when decommissioning spends are incurred companies will, over their productive life, effectively have ‘overpaid taxes’ and so will be in a ‘tax credit’ situation at cessation of production.
Filing for these tax reliefs in recent years when income streams have been low has attracted tax rebates against previous taxes on profits, paid in line with standard business taxation practises.
The above can give the appearance that the government is paying towards decommissioning, but it is actually just a ‘rebalancing’ of the tax accounts. It is not cost, it is cashflow.
In Shell's case the biggest share of the most recent rebate, £56.7million, relates to decommissioning old platforms at the giant Brent field.
Shell said yesterday that overall profits from the Brent field have been taxed at 70%, more than £20billion of tax revenue in today’s money.
Shell spending plans
Shell has operations in more than 70 countries and reported a quadrupling of underlying profits to $19.3 billion in 2021 as oil and gas prices soared. It is spending $8.5 billion on share buybacks in the first half of this year.
However, the company recently announced that it is looking to invest between £20billion and £25billion in the UK energy system over the next decade.
David Bunch, the energy giant's UK country chair, said three quarters of those funds would be spent on zero carbon projects, accelerating the firm's energy transition.
He was responding to Chancellor Rishi Sunak's Spring Statement, which called for a new “culture of enterprise” and greater capital investment that will increase UK productivity, skills development and growth.