What is windfall tax – and will the government impose it on energy companies?

What’s all the fuss about windfall tax and how will it affect you?
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  • Windfall tax is a hot topic right now. With many households struggling with spiralling energy bills in the wake of the energy price cap increase, the likes of Shell and BP have been raking in massive profits during the current energy crisis.

    This has sparked a debate over whether these energy giants should pay a windfall tax on their extra profits. And it’s a topic that politicians have very different views on. But what does a windfall tax mean and who is responsible for imposing it?

    What is windfall tax and how does it work?

    A windfall tax is a one-off Government tax on companies making big unexpected, ‘windfall’, profits. The Labour leader Keir Starmer is proposing a windfall tax on oil and gas companies in the North Sea. These companies have been making higher than expected profits, running into billions of pounds.

    Laura Suter, Head of Personal Finance at online investment company AJ Bell, says: “These energy giants have made higher profits thanks to soaring energy prices across the world, as a result of an increase in demand and instability in Russia and Ukraine. While big energy companies have benefited from this rise in demand, these higher energy prices have hit consumers, in the form of higher gas and electricity bills, and they are expected to rise again in October next year”.

    Both BP and Shell have raked in bumper profits with BP making £10 billion in profits last year according to Sky News and £7.2 billion for Shell.

    Steve Reed MP, Shadow Secretary of State for Justice was interviewed on Good Morning Britain yesterday (May 11th). He said the windfall tax is about taxing energy companies on the ‘surplus profits’ they’ve made as a result of the energy crisis.

    Oil and gas companies in the North Sea are taxed in a different way to most businesses. They pay a 30% rate of corporation tax, whereas the standard rate is 19%. They also pay a 10% tax surcharge, meaning a total of 40% tax.

    Labour has suggested raising this 40% tax rate to 50%. The money raised will then be used to help families struggling in the current energy crisis.

    Who imposes windfall tax and what’s the impact?

    It would be up to the Government to impose a windfall tax, which could provide much needed financial help paying our energy bills. However the Labour and Conservative parties are divided on the issue of whether this is the right move.

    Labour Leader Sir Keir Starmer wants the tax, which could raise nearly £2 billion for the Treasury. He argues that it could provide up to £600 per household to help with rising energy bills.

    However, Prime Minister Boris Johnson is against the idea of a windfall tax. He claims it would deter oil and gas companies from investing in new technology and green projects. Further still, he argues that it’s this future investment that will lead to lower energy bills.

    The Prime Minister’s view was echoed by Michael Gove MP when interviewed on Good Morning Britain. He said this move is, “the wrong tax, levied at the wrong time and in the wrong way” and could “deter investment in the North Sea”.

    Covering the cost of energy bills is a priority for most households right now. But if a windfall tax is introduced, it could also have a knock on effect on your pension pot.

    AJ Bell’s Laura Suter says: “Lots of big pension schemes own the oil giants, which means that lots of people across the UK with pensions benefit from any dividends the companies pay out”.

    “The more these energy companies are paying in tax, the less they have to distribute to investors in the form of dividends”.

    Have taxes like this been imposed in the UK before?

    Windfall taxes have been imposed in the UK before, by both Labour and Conservative Governments. The big one was when then Chancellor Gordon Brown introduced a windfall tax in his 1997 Budget. This was levied on big-name energy and utility companies that had previously been privatised under Conservative Governments.

    Labour claimed these big-name giants including Scottish Power, BT, United Utilities and airports operator BAA, were ‘undervalued’ when they were sold off. A windfall tax was introduced, based on the difference between the price at the sell-off compared with their profits four years later.

    And the Conservative Chancellor Geoffrey Howe, imposed a similar tax on the banks, after interest rates soared to 17% back in 1979, and ironically, given today’s argument, also imposed a form of windfall tax on North Sea oil and gas companies.