As everyday gas and electricity bills continue to soar for ordinary people, the revelation that some of the big energy companies are making huge profits has left a nasty taste in the mouth. It has led to increasing calls for a one-off tax on massive firms such as BP and Shell to tackle the cost of living crisis.
Opposition parties in parliament are demanding the Government take urgent action. In response, Prime Minister Boris Johnson has said that "no option is off the table". Others claim that the best way to help struggling families is to force the UK energy providers to slash bills.
The Chancellor Rishi Sunak has previously voiced his reluctance to introduce a windfall tax on oil and gas firms, however, it is reported that it is a move that is becoming increasingly likely. There is some speculation that it could also be applied to electricity companies.
What is a windfall tax?
A windfall tax is a retrospective levy imposed on a firm after it makes a large and unexpected profit. The political climate for introducing one in the UK has come about due to a hike in oil and gas prices on the international markets - driven by events such as the war in Ukraine.
While the public suffers the consequences, it is thought to be unfair that the energy producers and suppliers benefit financially from the crisis. The counterargument is that the government does not want to see the big firms reduce investment in renewable energy sources to deal with climate change.
As the debate rages in the UK, other countries such as Italy and Spain have announced a windfall tax on energy firms to alleviate the strain on households. BP and Shell recently announced that their profits have more than doubled in the first three months of this year.
In the case of Shell, its profits during this time rose to $9.13bn (£7.3bn). It is believed to be the largest quarterly profit the firm has ever recorded. For BP, it has reported a $6.2bn (£4.9bn) profit in the same period.
The companies, however, claim that Russia's invasion of Ukraine has left them with severe losses. Shell says that pulling out of Russia cost it $3.9bn (£3.1bn). BP, meanwhile, says that its profits were offset by the money it has to write off in ditching its investments in Russian oil and gas.
The Chancellor is expected to unveil a multibillion-pound plan to help struggling families and to get to grips with rising inflation, which is currently at 9 per cent, later this week. If these measures do include a windfall tax, the levy could be linked to the amount of investment each firm delivers, according to The Telegraph.
There are several ways that a windfall tax can be placed on companies. The government could increase the rate of corporation tax on firms making excess profits. This could include placing it at a level reflecting where their profits would normally have been without the crisis that has caused them to soar. Another option is introducing an excise tax on specific goods and services.
Do windfall taxes work?
The best-known windfall tax in the UK was introduced by the Labour government in 1997. It was placed on previously nationalised firms that had been privatised by the Tories, including companies like BT, United Utilities and Scottish Power. It raised £5.2bn in two years, according to figures from the Institute for Fiscal Studies.
Another example came in 1981 involving banks that had benefited from high-interest rates. Then Chancellor Geoffrey Howe also forced a one-off supplementary petroleum duty tax on North Sea oil and gas firms.
The Conservative government did something similar in 2011 in the form of a 'supplementary charge' on North Sea oil and gas producers which is reported to have raised around £2 billion a year. The latter instances both resulted from claims they were disproportionately benefitting from international price increases.
Some argue there are advantages to introducing windfall taxes. But other experts claim there can be unforeseen drawbacks that can prove to be counterproductive.
Critics have pointed out that pensioners could lose out if pension funds are linked to the big oil and gas firm profits in the form of shares. That would mean older people being hit due to a fall in dividends However most pension funds have widely diversified investments.
Supporters of a windfall UK tax on oil and gas firms claim they have already benefitted from low tax rates, with more actually paid back to them in many cases in the form of tax relief. They argue that this means planned investment in green energy is unlikely to be significantly impacted.
According to the BBC, this was the case for BPs between 2015 and 2020, with its accounts showing the company received greater refunds from the government than it paid. The reason for this was to offset things like the cost of decommissioning North Sea oil platforms.
