Ex-Treasury taxation chief predicts North Sea swoop

A former head of taxation at the Treasury has predicted a multi-billion-pound swoop on the cash-rich North Sea oil industry in Gordon Brown's pre-budget report this autumn.

The warning from Chris Sanger, now in charge of tax policy at accountants Ernst & Young, has unnerved the UK Offshore Operators Association, the North Sea trade body, which expressed fears the industry's significance was being "overlooked".

The Treasury has been considering a range of plans for a shake-up of North Sea taxes, including the possibility of putting them on a sliding scale linked to the level of the oil price. The offshore oil and gas industry is seen as an obvious source of revenues for Mr Brown, whose enormous public spending plans at a time of declining revenues are threatening to leave a massive hole in his accounts. Meanwhile the trebling of oil prices over the last three years has led to BP, Shell and others making the biggest profits in their history.

A small readjustment in the timing of oil industry payments netted the Exchequer £1.1bn at the last budget, but Mr Brown is looking for ways of getting a much bigger contribution next time.

The oil companies are unpopular with the public, with motorists blaming them for the high cost of petrol, rather than the government which pushes up prices at the pump through heavy taxation.

Treasury officials are mindful however that a heavy-handed increase in corporation tax in 2002 for oil companies, when it was raised from 30% to 40%, led to a huge fall-off in drilling rates in the North Sea. They are also aware that a repeat of the windfall tax that hit the privatised utilities soon after Labour took office would risk undermining the stability of the wider tax regime.

The British oil industry is already a huge contributor to the Exchequer, paying around £5bn a year since the turn of the decade. That is expected to rise to £7bn this year with higher oil prices. North Sea producers also pay petroleum revenue tax on their hydrocarbon output and this can be at levels of between 30% and 70% depending on the age of the field.

The Treasury was unwilling to comment on its plans but Mr Sanger said the oil industry should be braced for change.

"I expect there will be a reform of the North Sea taxation system. The current system as it stands has arisen over time and is not economically coherent," said Mr Sanger, who was head of business tax policy at the Treasury for three years before joining E & Y this year.

The UK Offshore Operators Association warned three weeks ago of the risk of "further tax hits" but said last night it did not know of any new tax proposals. "We have a very close relationship with the Treasury ... We are not aware of any possible review but you can never second-guess the government," said a spokeswoman.