Metis AM
In the past few weeks, the government has been under a significant amount of pressure to help Brits affected by the recent surge in the rate of inflation. The cost of many goods, from loaves of bread to litres of petrol, has increased sharply and many households are feeling the pinch.
To raise some much-needed funds, the Treasury has announced that they will implement a “windfall tax” on the profits of oil, gas, and electricity companies. According to government estimates published in the Guardian, this move could raise up to £5 billion.
If you’re wondering what this tax will involve, and how it might affect the economy, read on to find out everything you need to know.
The Treasury plans to implement a windfall tax to help fight the cost of living crisis
Put simply, a windfall tax is a one-off tax the government imposes on a company that was lucky enough to benefit from something they weren’t responsible for.
For example, following their invasion of Ukraine, the implementation of international sanctions on Russian exports has caused the price of oil and gas to increase sharply. As a result, companies in the fossil fuel industry, as well as energy providers, have enjoyed strong profits in recent weeks.
According to the BBC, BP’s underlying profit doubled to £4.9 billion in the first quarter of 2022, while Shell’s tripled to £7.3 billion in the same period. Critics argue that when so many Brits are currently struggling to get by, a temporary increase in the amount of tax these companies have to pay isn’t unreasonable.
While the government’s plan might seem unusual, it’s important to remember that it isn’t without precedent.
One of the most famous examples of a windfall tax was in 1997, when the then-chancellor Gordon Brown targeted recently privatised utility companies, such as BT and Scottish Power.
According to the Institute for Fiscal Studies, this move raised £5.2 billion (£8.7 billion in today’s money) over two years.
The Conservative chancellor Geoffrey Howe also imposed a special tax in 1980 on oil and gas companies that operated in the North Sea. The following year, he imposed a similar measure on banks, arguing they benefited from rising interest rates.
The government plan to implement an additional 25% levy on the profits of oil and gas companies
Due to their potential for higher profits, oil and gas companies that operate in the North Sea are treated differently than other companies for tax purposes.
While most companies have to pay Corporation Tax at 19%, oil and gas firms have to pay 30%, as well as a 10% supplementary rate on top of this.
However, they also have a much larger capital allowance than other companies do. This means that oil and gas firms can reduce their tax bill when they reinvest profits and create new jobs. For example, this could include funding green energy schemes in the UK.
According to the Guardian, instead of raising their Corporation Tax or supplementary rate, the Treasury plans to implement a “temporary, targeted energy profits levy” of 25% for the 2022/23 tax year.
“The oil and gas sector is making extraordinary profits, not as the result of recent changes to risk-taking or innovation or efficiency, but as the result of surging global commodity prices driven in part by Russia’s war,” chancellor Rishi Sunak stated.
He also said that he was “urgently evaluating” the possibility of a similar levy on electricity companies. According to the Guardian, government estimates suggest these firms could have made more than £10 billion in excess profits as a result of higher gas prices.
Critics warn that excessive taxes on gas and oil companies could affect investors
While the move will raise some much-needed cash for the Treasury, critics warn that it could hamper foreign investment in the UK. As you might imagine, at a time when the country is trying to secure its energy supplies, penalising successful companies might send the wrong message.
One vocal critic of the windfall tax is business secretary, Kwasi Kwarteng. He was quoted in the Telegraph as saying the plan would be “a tax on jobs, would destroy investment, and would add to the uncertainty in oil markets”.
That being said, according to the BBC, BP’s chief executive, Bernard Looney, told newspapers that such a move would not affect the company’s planned investments in the UK.
Another argument against the government’s windfall tax is that, while many oil and gas companies saw greater profits due to the war in Ukraine, there is some nuance to the issue.
For example, according to figures from the BBC, Shell’s decision to exit from its investments in Russian oil firms, after the country’s invasion of its neighbour, cost it £3.1 billion. Due to this principled stance, their profits are not as high as they may initially appear.
Finally, critics have highlighted the fact that excessively taxing oil and gas companies could negatively affect their share prices. Many pension funds, for example, choose to invest in the energy sector and so this move could pose a problem for investors.
If you’re concerned about what this move could mean for your wealth, seeking professional financial advice can help to give you greater peace of mind.
When you work with a planner, they can manage your investments on your behalf, so you can be confident that your portfolio won’t be affected by any short-term issues.
Get in touch
If you want to know more about how the windfall tax could affect your long-term plans, get in touch. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.
