What is a windfall tax, how much do oil companies already pay and has the UK ever tried it? | UK News


As people watch their energy bills soar, there have been renewed calls for a windfall tax to be imposed on oil and gas companies.

It comes after BP and Shell both reported a surge in profits as prices continue to soar around the world, exacerbated by the war in Ukraine and the COVID-19[feminine] pandemic.

What is an exceptional tax?

A windfall tax is a one-time tax imposed by a government that targets companies that have benefited from something for which they were not responsible – also known as windfall profits.

In the case of energy companies, they are take advantage of exorbitant prices partly because demand has increased as the world emerges from the pandemic and because of supply constraints following the sanctions imposed on Russia after its invasion of ukraine.

A windfall tax would affect companies from BP and Shell to smaller ones, such as Harbor Energy which extracts oil from the North Sea.

With households facing a cost of living crisis carried by a perfect storm of soaring energy costs, a national insurance increaseand one increase in other daily coststhe argument is that a windfall tax could be used to alleviate some of the pressures felt by the public.

Spain and Italy have already imposed such a tax.

The idea was featured in Labor’s manifesto during the 2019 election, with the party saying at the time it would raise £11billion and help the transition to a green economy.

One of the most famous examples of windfall tax in the UK was that announced by then-Chancellor Gordon Brown in 1997 when privatized utilities were hit for around £5 billion. pounds to pay for New Labour’s ‘welfare at work scheme’.

What would Labor spend the money on?

Labor said the government ‘simply has no more excuses’ not to impose a windfall tax on oil companies.

The party says its proposal would save ‘most households around £200 more’, but pensioners and those on the lowest incomes would have ‘additional targeted support’ and receive ‘up to £600 off bills “.

They say this would be achieved by removing VAT on home energy bills for a year from April 2022 and expanding and increasing the Warm Homes rebate.

Currently, only 2.2 million households benefit from the £140 warm house discount on their energy bills.

Labor say they would increase the budget to £4billion to ensure that the 9.3million households who would be eligible to receive the payment – including low-income pensioners and working-age households with young or disabled children – receive a £400 discount.

Everyone on Pension Credit or Universal Credit would receive the sum.

How much profit did the oil companies make?

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Do oil companies have to pay an exceptional tax?

Energy prices skyrocketed last year and in April the energy price cap was raised by 54% for the average household. Bills are expected to rise further when the price cap is reviewed in October.

But this high price of oil and gas has also led to a massive increase in profits for energy companies.

Last year, BP made a £10bn profit and admitted he had “more money than we know what to do with”.

Meanwhile, Shell announces record operating profit of £7.2 billion.

What are the arguments against an exceptional tax?

oil rig in the north sea
A tax could discourage investment in the North Sea

Oil and gas companies already pay a high rate of corporate tax, at 30% on their upstream profits, compared to 19% for most other companies.

They also pay an “additional tax” of 10%, so the industry is already taxed at more than twice the rate of a typical business.

There are also fears that it could deter investment in the North Sea and make the UK even more dependent on overseas oil and gas. With the UK trying to weaning off russian importsthis could see prices soar even further.

Has the UK ever introduced a windfall tax?

PA composite image showing Chancellor Gordon Brown holding the budget box on his first budget on 02/07/1997 (left) and Mr Brown holding the red box today.
Mr Brown introduced windfall taxes in his 1997 budget

Gordon Brown introduced a windfall tax in his first budget in 1997 on more than 30 companies that had been privatized by previous Conservative governments.

Among them were Scottish Power, BT and BAA.

Labor said these companies were undervalued when privatized and the tax raised £5.2bn over two years.

In 1981, the Conservative government imposed a similar tax on banks, arguing that they had benefited from high interest rates.

Analysis: Windfall taxes have been tried before – could such a move backfire?

What has the government said about this?

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Prime Minister discourages windfall tax

Prime Minister Boris Johnson said it was better for companies to invest the money in renewable energy rather than pay an additional tax.

During a visit to a school in his constituency of Uxbridge and South Ruislip in early May, the Prime Minister said: ‘What we don’t want to do is make the same mistakes as previous governments…as I just said – are failing to invest in our energy supply. So that’s the message we’re sending to the big energy companies.”

But amid growing clamor, including from some Tories, for the government to embrace the policy, ministers are beginning to reiterate the message that ‘all options are on the table’.

In the government’s strongest hint yet that a single windfall tax could be introduced, Simon Clarke, Chief Secretary to the Treasury, told Sky News’ Kay Burley that the imposition of such a levy could not be ruled out if the energy companies do not reinvest their windfall profits.

Mr Clarke said the government recognizes the “real challenge for households across the country”, which is likely to worsen again in the autumn when the energy price cap rises again.

He added: “On the very concept of a windfall tax, we are very, very clear that there is a real need, at a time when the industry is making very large profits, to see these profits reinvested in new offshore installations – getting more out of the North Sea, which is obviously vital in terms of energy supplies, but also good for jobs and the wider economy.

“If we don’t see this investment materialize, we know very clearly that all options are on the table.”

Hours later, the Prime Minister said “no options are on the table” to deal with the rising cost of living, but added: “I am not inherently attracted to new tax”.

Speaking earlier this month, Chancellor Rishi Sunak also said that while he was “not naturally drawn to” the idea, “no options are on the table”.

However, it is understood that the prime minister and other cabinet members still need convincing.

Brexit Minister Jacob Rees-Mogg dismissed calls for the tax, adding: “Short-term raids on businesses are not the answer to an inflationary problem.”

Read more from Sky News:
Warning bills could rise by another £900 this autumn


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