Oil tax hike could weaken credibility on oil and gas

The tax hike will pay for a cut in revenue from petrol and diesel

The Treasury could lose credibility following the sudden increase in tax on offshore oil and gas production, a Commons select committee has warned.

The Treasury Committee's comments followed the Budget, delivered last month by Chancellor George Osborne.

They criticised the decision to raise the supplementary rate of corporation tax on the industry.

It came less than a year after the Tories promised to provide a stable tax regime in the sector.

In his budget, Mr Osborne said he was taking an additional £2bn each year in tax from the offshore energy sector by raising its supplementary levy on corporation tax from 20% to 32%.

This was largely used to pay for a cut in expected revenue from petrol and diesel prices, as he pulled back on forecourt fuel tax levels.

The committee, which has a majority of the Coalition government's backbench MPs, reported: "The decision to increase the supplementary oil and gas levy by 12 percentage points without warning, less than a year after the government had undertaken to provide a 'stable' tax regime in the sector, may weaken the government's credibility in seeking to establish a stable tax regime in this and other areas.

"Such reversals of policy in the absence of changes of circumstances that would warrant them is bad for business confidence and the credibility of government policy making."

Responding to criticism from the industry that the increase had prompted it to review billions of pounds of investment in oil and gas fields under UK waters, the Treasury told MPs that evidence from a similar tax increase in 2005 showed it had "little effect", and that investment was more closely aligned to the oil price.

The committee also highlighted concerns that the price of gas was not as buoyant as oil, hence profits were not as high in that part of the offshore sector.

The rise in supplementary corporation tax increases the revenue take on some fields to 81%.

While the government has said high oil prices are generating profits that justify such an increase, the industry has responded by saying it can take its investment to other more profitable parts of the world with a "more attractive" tax regime, and that many UK job opportunities could be lost as a result.