The charts below show oil and gas receipts in both cash terms and as a share of national income (GDP), along with our March 2022 Economic and fiscal outlook (EFO) forecast.
Receipts measured in cash terms are a simple metric for analysing trends over time. But without putting the cash amount into context – by asking how much national income is available to be taxed – interpreting changes in cash receipts is difficult, particularly over long time periods.
Trends in receipts as a share of GDP are useful to understand how they move in line with the underlying economic activity that is being taxed. In cash terms, both receipts and GDP will tend to rise over time because of economic growth and inflation. Receipts as a share of GDP is the most relevant metric when considering the sustainability of the public finances. Movements in this ratio can be thought of in two parts – movements in the tax base relative to national income (i.e. whether oil and gas profits have grown faster or slower than the whole economy) and changes in the effective tax rate (i.e. the amount of tax raised per unit of the tax base).
The movements in oil and gas revenues between the peaks and troughs since the early 1970s can be explained by drivers of taxable profits – the volume and price of production, which together provide a proxy for sales, and the implied profit margin on those sales – and the effective tax rate paid on those profits. In our December 2014 EFO, we showed that:
- between 1979-80 and 1984-85 receipts increased by 420 per cent to £12.0 billion. That was driven by a 40 per cent rise in production, strong growth in sterling oil prices, higher profit margins and an increasing effective tax rate;
- between 1984-85 and 1991-92 receipts fell by more than 90 per cent to £1.0 billion. While sterling oil prices fell sharply over that period, the largest driver was a reduction in the effective tax rate paid on North Sea profits. This reflected a cut in the main rate of offshore corporation tax from 45 to 33 per cent and strong growth in operating and capital expenditure; and
- between 1991-92 and 2008-09 receipts increased strongly to £10.6 billion. Again, prices and the effective tax rate explained the rise, with oil prices hitting an all-time high in cash terms in mid-2008 and the introduction of the supplementary charge of corporation tax at 10 per cent in April 2002 and the increase to 20 per cent from January 2006.
Since 2008-09 UK oil and gas revenues fell from £10.6 billion (0.7 per cent of GDP) to £0.6 billion (0.03 per cent of GDP) in 2019-20. The fall in receipts was largely driven by falling production and higher tax-deductible expenditure. The rates of petroleum revenue tax and the supplementary charge were also cut substantially.
Following the dramatic rise in oil and gas prices in late 2021 and early 2022, we expect North Sea oil and gas revenues to increase more than ten-fold between 2019-20 and 2022-23, to £7.8 billion. Oil and gas revenues are then expected to fall back sharply in 2023-24, reflecting the falls in both oil and gas prices in 2023 and 2024 predicted by futures markets. Falling oil and gas production (assumed to fall by 5 per cent and 9 per cent a year respectively from 2023 onwards) also reduce receipts in the later years of the forecast.
Both ‘ring-fence’ corporation tax and the supplementary charge are payable in three instalments each year. The rate of PRT has now been set to zero, so no payments are made, although PRT repayments related to decommissioning costs are still paid out across the year, reducing net receipts.
Offshore CT receipts: ONS (ID: CPSB,)
PRT receipts: ONS (ID: DBHA)
More detail can be found in paragraphs 3.45-3.48 of our March 2022 EFO.
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