Shell has announced the biggest profits in its 115-year history, notching up nearly $40bn for 2022. However, it only paid $134m of that to the UK government under the windfall tax introduced last year.
How is the tax calculated?
The energy profits levy, brought in last year, taxes the profits of all companies which extract oil and gas in the British areas of the North Sea, whether those companies are based in Britain or abroad. It was originally an extra 25% charge bringing their total UK tax rate to 65%, and was due to last until the end of 2025 at the latest. This was later increased to a 35% charge – or 75% total tax rate – and extended to potentially as late as April 2028.
Europe raised a larger sum from Shell last year under its “solidarity contribution” scheme, with the company paying out $520m to the EU in 2022, compared to $134m in the UK. The EU uses a different method to tax windfalls: a levy of at least 33% on oil and gas company profits that are at least 20% above their historic average.
That should rebalance next year: Shell expects to pay about $500m to the UK government in 2023.
Is that a fair amount?
The company has explained the low sums paid out to the Treasury under the windfall levy by saying the UK as a market presents “less than 5%” of global revenues. And managers stress Shell pays all taxes due.
Shell moved its headquarters and tax residence from the Netherlands to the UK last year, so one might expect that to lead to more profits and revenues being booked in Britain. So far, it’s not clear whether that will be the case. Globally, the company paid $13bn in taxes in 2022. It discloses its tax payments by countryin a separate report and in 2021, the most recent year for which there are numbers, Shell reported a $940m loss before tax in the UK, paying no tax and instead booking a $54m tax credit.
Shell is not as big a player in the North Sea as it once was – having sold off assets to rivals – so the UK’s contribution to its global oil and gas profits has diminished.
Could Shell pay more in the UK?
The UK windfall tax was introduced by Rishi Sunak when he was chancellor, in May last year. He said it would raise £5bn.
However there is a sweetener. Companies can reduce their payments if they invest capital in new production in the North Sea – covering everything from hiring vessels and rigs to engineering contracts.
The reason for this allowance was to boost oil and gas production to ensure the security of supplies to Britain after the invasion of Ukraine.
Jeremy Hunt, who took over as chancellor last autumn, made the allowances less generous – reducing them from 80% to 29% of capital expenditure. Investment in decarbonising operations remained at 80%. He said this, and a raid on electricity generators, would raise £14bn in 2023.
Labour shadow climate secretary Ed Miliband has argued that this “massive loophole” should be scrapped and the headline rate of tax increased from 75% to 78% of profits. He said the allowance has left “billions on the table”.
There is also an ongoing question across industries over where tax should be paid. “The problem is there is a difference between where the customer is and where the production is,” says Richard Murphy, co-founder of the Tax Justice Network. “They’re paying the tax where production is. We, the customer, are paying the price but we’re not seeing the benefit of the tax paid.”
What does Shell say?
Finance chief Sinead Gorman said that “$13bn of global taxes makes sure we play our part across the world to ensure that governments have money to be able to reallocate where they feel fit to do so. We make sure we’re providing the energy that is needed”.
New boss Wael Sawan said the company is continually assessing the “investment climate” in the countries it operates in to assess the stability of their environment and projected shareholder returns. “It’s important to retain that stability through thick and thin. What we have not seen is government stepping in when oil or gas prices are very low. I think there has to be a balance when oil prices are high that we don’t see windfall taxes and prices caps … this is a market that needs to be allowed to move,” he said.