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Centrica shares recover after 4% fall on tax warning

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Shares in Centrica fell by almost 4% yesterday after the company warned that, following the increase in UK tax rates for oil and gas production, it no longer expected to maintain previously projected high levels of investment in the UK. The shares had recovered half of yesterday’s losses by 9.30 am today.

Centrica, the owner of British Gas, said in an interim management statement that it continued to expect growth in group earnings but ‘at a more modest rate than anticipated at the time of our last results announcement as upstream profits have become more highly taxed’.

‘The increase in the supplementary charge rate from 20% to 32% on UK production announced in [the March 2011 Budget] offsets the benefit of higher prices, with the tax rate on some of our UK gas and oil fields increasing to 81%,’ the company said. It expects the group's effective tax rate for financial year 2011 to be around 45%, equating to an increase in the tax charge of ‘some £300 million on last year’.

Mark Hanafin, Managing Director of Centrica Energy, said on the day of the Budget announcement that the ‘tax hike’ could have ‘a chilling impact on future investment in the North Sea’.

Financial Times commentators observed that the fall in the share price ‘seems overdone given the tax increase was announced in March’. They wrote: ‘The actual hit from the increase in the supplementary charge is about £50m-£60m this year. The remainder of the £300m additional charge is because Centrica is actually producing more oil and gas – and will benefit from the higher wholesale prices.’

But Nils Pratley, Financial Editor at The Guardian, suggested that the government may be forced into a U-turn. ‘Of course, it suits Centrica to make such points,’ he wrote. ‘But the company has a strong argument that the economics of oil and gas production are very different. It looks as if George Osborne failed to appreciate how, for gas producers, the investment case for the UK has become tight.’