What is a windfall tax – and could it contribute to the cost of living?

Chancellor Rishi Sunak on Thursday (May 26) announced a major package to ease the cost-of-living crisis that included a windfall tax, marking a significant reversal in the Conservative Party’s stance on the levy.

It followed the publication of the Sue Gray report and Boris Johnson, who had previously dismissed calls for a windfall tax on energy companies, despite BP reporting a big profit surge and rising bills hitting Brits across the country.

Sir Keir Starmer had argued that a reversal was “inevitable” as the tax on North Sea companies “would bring in billions of pounds and lower energy bills across the country”.

The idea of ​​a windfall tax had met opposition in government and Mr Sunak himself was among ministers to warn of the impact it would have on future investment.

But the Chancellor said his plan for a 25 percent levy on energy yields would be coupled with a new stimulus that would nearly double the tax break available for investment.

Here we explain what the Windfall Tax is, who opposes it and how it could help alleviate rising energy bills.

A windfall tax is a one-off levy imposed by the government on a company, or group of companies, that has unexpectedly benefited from something outside of their control – in this case, a rise in oil and gas prices.

Spain and Italy have already announced a windfall tax for energy companies.

Labor has proposed a year-long 10 percentage point increase in corporate taxes on oil and gas producers.

The party has said this would raise £1.2billion.

The Government said it will take £5billion from the windfall tax it announced on Thursday for oil and gas companies but left a backdoor for companies to avoid much of the fee when investing in new oil.

Energy companies already pay 40% of their profits in taxes, but the additional levy announced by Chancellor Rishi Sunak will increase this to 65% by December 2025.

The additional tax bill could also be phased out before then if oil and gas prices return to more normal levels, although when asked, the Treasury Department declined to say what those normal levels are.

But companies can also avoid almost their entire tax bill after the Chancellor doubled the relief they can get for investing in new oil and gas production.

“Like previous governments, including the Conservatives, we will introduce a temporary targeted energy profits levy, but we have built into the new levy a new investment allowance similar to the super deduction, which means companies will have a new and significant incentive to reinvest their profits ‘ Mr Sunak said.

The idea behind the tax is that the money raised could be spent to ease the cost-of-living crisis for the hardest hit households.

Labor has repeatedly argued that a one-off annual windfall levy could raise £1.2billion to help fund rebates on home electricity bills.

The party proposed an additional 10% on corporate tax paid by oil companies operating in the North Sea.

This would not only affect well-known companies like BP and Shell, but also lesser-known ones like Harbor Energy – which actually extracts more oil from the North Sea than any other producer.

Mr. Sunak previously ruled out a windfall tax.

He had told Mumsnet he was concerned a windfall tax could defer investment in new oil and gas production, but added: “If we don’t see those kinds of investments, companies won’t make those investments in our country and energy security.” , then of course I would look at it.”

His comments in an interview with the Mumsnet website came just hours after the Prime Minister and Deputy Prime Minister both opposed the tax.

Mr Sunak said companies making big bucks from rising wholesale gas and oil prices need to step up and reinvest to make the UK less dependent on foreign energy.

He said, “If we don’t see those kinds of investments, and if the companies aren’t going to make those investments in our country and in our energy security, then of course I would look at that (an unexpected tax).”

The idea of ​​a windfall tax had met opposition in government and Mr Sunak himself was among ministers to warn of the impact it would have on future investment.

But the Chancellor said his plan for a 25 percent levy on energy yields would be coupled with a new stimulus that would nearly double the tax break available for investment.

Mr Johnson told Good Morning Britain on Tuesday (3 May): ‘If you impose a windfall tax on energy companies, it means you discourage them from making the investments we want to see to end energy prices to keep lower for everyone.”

Meanwhile, Economy Minister Kwasi Kwarteng told Sky News: “I have never been a supporter of windfall taxes.

“I’ve made that very clear publicly, I think it discourages investment and the reason we want investment is because it creates jobs, it creates wealth and it also gives us energy security.”

Mr Kwarteng added: “He’s the Chancellor of the Exchequer, he’s in charge of tax policy.

“From my point of view, I would like to see investments in the North Sea.”

Brexit Secretary for Opportunities Jacob Rees-Mogg argued it was wrong to plunder the “honey pot of business” and that the measure would ultimately result in the public paying more in taxes.

Labor’s Sir Keir Starmer had urged the government to introduce the one-off levy on oil and gas giants to help families cope with the cost of living crisis.

The Labor leader told MPs on April 27: “North Sea oil producers are making so much windfall profit that they call themselves ‘a moneymaker’.

“This money could be used to keep energy costs down.”

The Liberal Democrats also backed a windfall tax, with leader Ed Davey saying energy companies should “pay a little more to help the most vulnerable”.

The SNP and the Greens also supported such a tax.