Image Source: Bloomberg
Shell said it would pay taxes in the UK for the first time since 2017 because it made a lot of money worldwide in 2018.
In the last three months of the year, the energy company expected its profits in the UK and EU to “take a hit” of about $2bn (£1.7bn).
Because oil and gas prices are so high, energy companies have made a lot of money, so governments have taxed them.
In the end, Shell won’t say how much tax it will pay to the UK.
Right now, the number might be lower than expected.
When losses, investments in things like renewable energy, and taking oil platforms out of the North Sea are taken into account, the amount of tax that oil and gas companies in the UK pay can go down.
Shell’s profits went up by a huge amount last year. Between July and September, they raised $9.5 billion around the world.
At the time, Shell said it didn’t have to pay taxes in the UK because it had made big investments there but hadn’t made any money there.
But the company said Friday that it plans to pay taxes in the UK for the first time since 2017.
In November, the government raised the UK’s tax on oil and gas extraction profits from 25% to 35%. This policy is called the Energy Profits Levy, but most people call it a “windfall tax.”
Shell didn’t say how the $2 billion hit to its earnings in the last few months of 2022 would be split between the UK and the EU.
Shell more than doubled its earnings after the lockdowns
After the COVID lockdowns ended, oil and gas prices increased, but when Russia invaded Ukraine, they went through the roof. Because of this, energy companies like Shell and BP made a lot of money in 2022.
The government was pressured to do something as people’s energy bills went up. As a result, it put a windfall tax on firms’ profits to help pay for a plan to keep gas and electricity bills low.
Companies that look for oil and gas in the North Sea are taxed in a different way than other companies.
On their profits, they pay a tax of 30% and another tax of 10%. Plus, they have to pay the windfall tax, which brings their total tax rate to 75%.
But people have worried that the policy could be better.
By taking into account losses or spending on things like tearing down oil platforms in the North Sea, companies have been able to pay less tax. Companies like BP and Shell have paid little or no tax in the UK in the past few years because of this.
The Energy Profits Levy also has a rule that lets energy companies get tax breaks worth 91 pence for every pound they spend on fossil fuel extraction in the UK.
But there are also concerns that oil and gas companies might be less likely to invest in renewable energy in the UK if they have to pay higher taxes.
Offshore Energies UK has said that higher taxes would “weaken” an industry that gives more than 200,000 people jobs.
Shell was still on track to make a lot of money in 2022, even though taxes were going up. The business made $30 billion in last year’s first nine months.
In the last quarter of 2022, the company expects to pay between $4.3 billion and $4.7 billion in taxes worldwide.
Rival BP said it would pay an $800 million windfall tax in 2022.
On February 2, its financial results for 2022 will be made public.
The EU has put a windfall tax on energy companies, just like the UK. This includes putting a 33% tax on the profits of fossil fuel companies and another tax on the money they make when the price of electricity goes up.
What is the windfall tax?
A windfall tax is a government fee that adds to a business’s normal costs.
The plan is to go after companies that get money for something they didn’t do. We call this a “windfall.”
This time last year, oil and gas were worth less to energy companies than they are now.
This is because demand went up after the COVID restrictions were lifted, and people were worried about the energy supply because of the Ukraine war.
How does the new tax work?
Rishi Sunak set up the tax when he was chancellor. He called it a “25 percent Energy Profits Levy.”
In his Autumn Statement, Chancellor Jeremy Hunt said that this would go up to 35% in January 2023 and stay that way until March 2028. Before, the deadline was set for the end of 2025.
The levy applies to profits made when oil and gas are taken out of the UK but not when oil is refined, or gasoline and diesel are sold at gas stations.
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Labour didn’t like the scheme because it gives companies tax breaks worth 91p for every £1 spent extracting fossil fuels in the UK. But this money will keep coming.
Over the next six years, the tax would bring in £40 billion, according to Mr. Hunt.
The UK government also put a temporary 45% tax on the “extraordinary returns” of power plants that use less carbon.