Budget 2016: Industry reacts to tax breaks and levies

In February, members of the UK oil and gas industry called for a significant permanent reduction of ‘special taxes’ paid by the sector. Today, Osborne obliged by cutting the supplementary charge on oil and gas extraction to 10%.

The effective abolition of Petroleum Revenue Tax has long been called for by the industry and will be welcomed widely

Richard Cockburn, energy partner at Bond Dickinson

Osborne also announced the “effective abolishment” of the Petroleum Revenue Tax as part of tax reforms to the North Sea.

According to the government, new tax support for the industry will be worth roughly £1 billion.

Industry body Oil & Gas UK, which lobbied the government in February over taxes paid by the sector, said it welcomed steps to reduce the “heavy tax burden” on the industry.

Richard Cockburn, energy partner at UK law firm Bond Dickinson, said the tax reductions would help to improve the economics of North Sea projects.

“The effective abolition of Petroleum Revenue Tax has long been called for by the industry and will be welcomed widely. The reduction of the supplementary charge may allow operators to take a second look at projects which, until now, were looking uneconomic,” he said.

Energy & Renewables

In his speech, the Chancellor also pledged £730m for renewable energy and scrapped the Carbon Reduction Commitment tax. As a result, the Climate Change Levy will rise from 2019 to make up for the lost revenue, but the most energy intensive industries such as steel would remain "completely protected," he said.

"The budget does not change the current government's narrative on renewables and low carbon," said Chris Towner, oil and gas partner at Bond Dickinson.

"The allocation of £730m for support for projects that begin exporting power in the period beyond 2021 is helpful in that it gives the first piece of certainty that some support beyond 2021 will be available. On the other hand, when compared with the levy control framework cap of £9bn for projects that start generation in the period up to 2021, it implies a substantial slowdown in the likely rate of deployment for renewables and low-carbon technologies."

The 2016 budget also included plans to expand interconnection capacity from electricity suppliers outside of the UK to 9GW.

However, Colin Brown, director of engineering at the Institution of Mechanical Engineers (IMechE) warned that a greater reliance on interconnectors to import electricity from Europe and Scandinavia was likely to lead to higher electricity costs and less energy security.

"Currently there are insufficient incentives for companies to invest in any sort of electricity infrastructure or innovation. Government needs to introduce measures to encourage reducing electricity demand,” he said.

“We need to take urgent action to work with industry to create a clear pathway with timeframes and milestones for new electricity infrastructure to be built including fossil fuel plants, nuclear power, energy storage and combined heat and power.” 

Nuclear

The Chancellor also offered clarity on the competition programme for small modular nuclear reactors (SMRs) and promised a roadmap for their delivery - a move that has been welcomed by the Nuclear Industry Association (NIA).

“Small modular reactors could potentially play a significant complementary role to the UK’s existing new build programme and it is welcome that the government is looking seriously at the development of SMRs,” said Tom Greatrex, NIA chief executive.

“It is important that the road map, the Chancellor has promised by the autumn should maximise the opportunities for UK industry.”

However, the NIA expressed its disappointment that the Chancellor has left a decision on the carbon floor price to later in the year.

“While we welcome the progress made in advancing small nuclear reactor development in the UK, it is disappointing the long-term direction of the carbon price floor will not be set out until the Autumn Statement,” Greatrex added.

Food & Drink

Meanwhile, the Chancellor also unveiled a sugar levy on the soft drink industry in an effort to tackle childhood obesity, which it said would be introduced in 2018.

It has estimated the measure will raise about £520m, which the government intends to put towards expanding sport in schools.

Nicky Strong, a legal consultant at Bond Dickinson, said: "The so-called sugar tax has finally come to fruition, albeit only on water-based soft drinks, so excluding pure fruit juices and milk-based drinks.

"The levy will be calculated on the total sugar content of these drinks, and will be charged direct to producers and importers, rather than being added to the price paid by consumers."

We are extremely disappointed by the Government’s decision to hit the only category in the food and drink sector which has consistently reduced sugar intake in recent years - down 13.6% since 2012

Gavin Partington, director general of the BSDA

A report published in February by Cancer Research UK and the UK Health Forum indicated that a 20% tax on sugary drinks could reduce obesity rates in the UK by 5% by 2025.

The study also predicted that the tax could save the NHS about £10 million in healthcare and social care costs in 2025.

However, the British Soft Drinks Association (BSDA) argues that taxes on sugar have proven ineffective elsewhere, based on a 2014 study into obesity conducted by McKinsey Global Institute and Public Health England. It said the report had indicated sugar levies would be far less effective than reducing portion sizes and reformulating products.

“We are extremely disappointed by the Government’s decision to hit the only category in the food and drink sector which has consistently reduced sugar intake in recent years - down 13.6% since 2012," said Gavin Partington, director general of the BSDA.

"We are the only category with an ambitious plan for the years ahead – in 2015 we agreed a calorie reduction goal of 20% by 2020.  By contrast sugar and calorie intake from all other major take home food categories is increasing – which makes the targeting of soft drinks simply absurd.”

Apprenticeships

Manufacturers, meanwhile, are holding firm on their stance not to support the government’s Apprenticeship Levy, which was first introduced in the Chancellor’s 2015 Summer Budget. It is designed to encourage larger firms to take on more apprentices and help bridge the skills gap.

Money generated from the Levy, which is expected to be in the region of £3 billion, will be used to fund the government’s five-year apprenticeship scheme.

“Manufacturers firmly support the government’s ambition to create more high quality apprenticeships,” said Tim Thomas, director of employment & skills policy at the manufacturers’ organisation EEF.

“However, they do not support the use of a levy to get there. Industry has clearly set out what the government needs to deliver to ensure the levy is seen as a talent generator and not a tax but today’s announcement does little to allay manufacturers’ fears, even with the announcement of a 10% top-up for levy payers,” Thomas added.