How Does A Windfall Tax Work?
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How Does A Windfall Tax Work?

Ellen Knight June 3, 2022

Chancellor of the Exchequer Rishi Sunak has announced a scheme to help Britain’s households out with rising energy costs. But it is partially funding this through a ‘windfall tax’ on oil and gas companies. The plan is that this will raise a much-needed £5bn over 12 months.

UK energy firms will now be paying 25% extra in tax over the next year. This comes after companies such as BP and Shell reported significant profits as oil and gas prices around the world surged over the past few months, leading to many calling on the government to introduce this tax.

What is it?

‘Windfall taxes’ are one-off taxes imposed by a government onto a company, aiming to target firms benefitting from a change in circumstance they weren’t responsible for – in other words, a windfall.

Demand for oil and gas has significantly increased worldwide in recent months, as the world slowly recovers from the COVID-19 pandemic as well as suffering shortages caused by supply issues resulting from the Russian invasion of Ukraine.

Photo by Leon Neal/Getty Images

How does it work?

A significant element of the tax – described by Sunak as a 25% Energy Profits Levy – means that any profit the companies have previously lost, or any funds being invested in ‘green’ endeavours such as decommissioning North Sea oil platforms can’t be utilised to reduce the tax they need to pay. Methods such as these have meant that in recent years BP and Shell, according to the BBC, ‘have paid almost no tax in the UK.’

What profits have they been making?

In the first three months of 2022, BP has reported profits nearly doubling, while Shell have seen their income nearly triple. Both companies, however, have written off a lot of money after removing themselves from investments in Russian oil firms after Russia invaded Ukraine.

Furthermore, Shell and BP have both already spent billions on share buybacks, which is when companies buy shares in the company itself to boost the share prices. It is this significant income that will now be subject to the 25% tax, in the hopes of earning the country £5bn to tackle the cost of living crisis.

What have politicians been saying?

The government has previously rejected the policy for being ‘unconservative’ – although windfall taxes have long been suggested by Labour, Liberal Democrats, and the SNP.

Prime Minister Boris Johnson previously described windfall taxes as deterrents to investment, saying: ‘I don’t like them. I don’t think they are the right way forward. I want those companies to make big, big investments.’

Labour leader Sir Keir Starmer has criticised the government for this u-turn, questioning on Twitter; ‘Why has it taken them so long while households suffered?

‘Now Labour has dragged them kicking and screaming to this obvious solution.’

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Ellen is a freelance journalist studying MA Broadcast Journalism at Cardiff University. Her work has appeared in publications such as Teen Vogue and Al Jazeera, and tends to focus on politics and current affairs. Her involvement in student radio station Burn FM lead to an interview she conducted winning Student Radio Moment of the Year in 2022. She has been writing for Freshered since February 2022. You can follow her on Twitter @ellenmjknight