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Energy prices: What is a windfall tax and how would it work? Energy prices: What is a windfall tax and how would it work?
(about 20 hours later)
There have been renewed calls for the government to impose a windfall tax on energy companies after BP reported a big increase in profits.There have been renewed calls for the government to impose a windfall tax on energy companies after BP reported a big increase in profits.
The company made an underlying profit of $6.2bn (£4.9bn) in the first three months of the year, compared with $2.6bn in the same period last year.The company made an underlying profit of $6.2bn (£4.9bn) in the first three months of the year, compared with $2.6bn in the same period last year.
Labour has been calling for a windfall tax on oil and gas companies in the North Sea to help households and energy-intensive industries cope with higher fuel bills.Labour has been calling for a windfall tax on oil and gas companies in the North Sea to help households and energy-intensive industries cope with higher fuel bills.
BP profits soar as calls for windfall tax growBP profits soar as calls for windfall tax grow
How much have the energy companies been making?How much have the energy companies been making?
BP's underlying profit more than doubled in the first quarter, although this was cancelled out by money written off as a result of the company's decision to exit from its investments in Russian oil companies following the invasion of Ukraine.BP's underlying profit more than doubled in the first quarter, although this was cancelled out by money written off as a result of the company's decision to exit from its investments in Russian oil companies following the invasion of Ukraine.
Another big energy company, Shell, will report its latest results on 5 May. Another big energy company, Shell, will report its latest results on 5 May. It reported strong profits for 2021, having had a difficult 2020 due to the pandemic.
It reported strong profits for 2021, having had a difficult 2020 due to the pandemic. BP and Shell have both spent billions of pounds recently on what are called share buybacks, which is what companies do when they have money they can afford to spend on boosting their share price.
They also pay relatively high dividends, which are the other way companies distribute their profits to shareholders.
What is a windfall tax?What is a windfall tax?
A windfall tax is a one-off tax imposed by a government on a company or group of companies.A windfall tax is a one-off tax imposed by a government on a company or group of companies.
The idea is to target firms that were lucky enough to benefit from something they were not responsible for - in other words, a windfall.The idea is to target firms that were lucky enough to benefit from something they were not responsible for - in other words, a windfall.
An example of such a windfall would be high energy prices. Companies that get oil and gas out of the ground are getting much more money for it than they were last year, partly because there has been so much more demand as the world emerges from the pandemic and partly because of supply concerns due to Russia's invasion of Ukraine.An example of such a windfall would be high energy prices. Companies that get oil and gas out of the ground are getting much more money for it than they were last year, partly because there has been so much more demand as the world emerges from the pandemic and partly because of supply concerns due to Russia's invasion of Ukraine.
Spain and Italy have already announced a windfall tax on energy companies.Spain and Italy have already announced a windfall tax on energy companies.
How countries are dealing with rising pricesHow countries are dealing with rising prices
What has the government said?What has the government said?
Boris Johnson told Good Morning Britain on 3 May: "If you put a windfall tax on the energy companies what that means is that you discourage them from making the investments that we want to see that in the end will keep energy prices lower for everybody."Boris Johnson told Good Morning Britain on 3 May: "If you put a windfall tax on the energy companies what that means is that you discourage them from making the investments that we want to see that in the end will keep energy prices lower for everybody."
The previous week, Chancellor Rishi Sunak told Mumsnet: "right now, what I believe the right thing to do is to encourage those companies to invest" but added that "nothing's ever off the table in these things", threatening to look again at taxes on energy companies if there was not enough investment.The previous week, Chancellor Rishi Sunak told Mumsnet: "right now, what I believe the right thing to do is to encourage those companies to invest" but added that "nothing's ever off the table in these things", threatening to look again at taxes on energy companies if there was not enough investment.
Critics of a windfall tax point out that many pension funds benefit from the profits of big oil companies. Some private pension funds own shares in them, which means they get some of the profits through dividends.Critics of a windfall tax point out that many pension funds benefit from the profits of big oil companies. Some private pension funds own shares in them, which means they get some of the profits through dividends.
The companies also employ thousands of people and support thousands of other jobs in the UK.The companies also employ thousands of people and support thousands of other jobs in the UK.
What has Labour said?What has Labour said?
Labour leader Keir Starmer told MPs on 27 April: "North sea oil producers are making so much unexpected profit that they call themselves 'a cash machine'. That cash could be used to keep energy bills down."Labour leader Keir Starmer told MPs on 27 April: "North sea oil producers are making so much unexpected profit that they call themselves 'a cash machine'. That cash could be used to keep energy bills down."
Labour proposed an increase of 10 percentage points on corporation tax (tax paid on profits) for North Sea oil and gas producers, in the year beginning in April.Labour proposed an increase of 10 percentage points on corporation tax (tax paid on profits) for North Sea oil and gas producers, in the year beginning in April.
It said this would raise £1.2bn, which could be used to help households struggling to cope with a 54% rise in energy bills from April.It said this would raise £1.2bn, which could be used to help households struggling to cope with a 54% rise in energy bills from April.
The Liberal Democrats also support a windfall tax, with leader Ed Davey saying energy companies should "pay a little more to help the most vulnerable". The SNP and the Green Party also back such a tax.The Liberal Democrats also support a windfall tax, with leader Ed Davey saying energy companies should "pay a little more to help the most vulnerable". The SNP and the Green Party also back such a tax.
Would a windfall tax affect investment?Would a windfall tax affect investment?
Clearly, we do not know what the energy companies would choose to spend less on if they were forced to give money to the UK government. BP plans to spend a maximum of £18bn on the UK's energy system by the end of 2030.
BP and Shell have both spent billions of pounds recently on what are called share buybacks, which is what companies do when they have money they can afford to spend on boosting their share price. The company's chief executive Bernard Looney was asked by The Times on 3 May which of its planned investments in the UK would not go ahead if the government introduced a windfall tax.
They also pay relatively high dividends, which are the other way companies distribute their profits to shareholders. Bernard Looney replied: "there are none that we wouldn't do."
BP was already planning to increase its global investment in green energy to $5bn a year by 2030 - it spent $2.2bn in 2021, mainly on offshore wind, solar and electric vehicle charging. Shell plans to spend between £20bn and £25bn on UK energy over the next 10 years.
It intends to spend a maximum of £18bn on the UK's energy system by the end of 2030.
Shell plans to spend $3bn this year on green energy worldwide. It plans to spend between £20bn and £25bn on UK energy over the next 10 years.
Have we had windfall taxes in the UK before?Have we had windfall taxes in the UK before?
The best-known windfall tax in the UK was announced by Chancellor Gordon Brown in his first Budget in 1997.The best-known windfall tax in the UK was announced by Chancellor Gordon Brown in his first Budget in 1997.
The companies paying the tax were those that had been privatised since 1979 by previous Conservative governments, including:The companies paying the tax were those that had been privatised since 1979 by previous Conservative governments, including:
power utilities such as Scottish Powerpower utilities such as Scottish Power
water and sewerage companies such as United Utilitieswater and sewerage companies such as United Utilities
the telephone company BTthe telephone company BT
the airports operator BAAthe airports operator BAA
1997: Gordon Brown announced a windfall tax in his first budget1997: Gordon Brown announced a windfall tax in his first budget
Labour argued that all these companies had been undervalued at privatisation. Their windfall tax was calculated as the difference between the price at which the government sold them, and a market valuation based on their profits in the four years after their sale.Labour argued that all these companies had been undervalued at privatisation. Their windfall tax was calculated as the difference between the price at which the government sold them, and a market valuation based on their profits in the four years after their sale.
Windfall taxes haven't only been a Labour policy. In 1981, Conservative Chancellor Geoffrey Howe imposed a similar levy on the banks.Windfall taxes haven't only been a Labour policy. In 1981, Conservative Chancellor Geoffrey Howe imposed a similar levy on the banks.
He argued that they had benefited from high interest rates, which had been raised to 17% in November 1979, although they were cut to 12% the day after the 1981 Budget.He argued that they had benefited from high interest rates, which had been raised to 17% in November 1979, although they were cut to 12% the day after the 1981 Budget.
Mr Howe later imposed a special tax on North Sea oil and gas companies.Mr Howe later imposed a special tax on North Sea oil and gas companies.
How much tax do oil companies pay?How much tax do oil companies pay?
Oil and gas companies operating in the North Sea are already taxed differently to other companies.Oil and gas companies operating in the North Sea are already taxed differently to other companies.
The taxes on their profits are higher, but they also have bigger capital allowances, which means they can pay less tax if they are investing money.The taxes on their profits are higher, but they also have bigger capital allowances, which means they can pay less tax if they are investing money.
They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other companies pay corporation tax at 19%.They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other companies pay corporation tax at 19%.
But the amount of UK tax paid by oil and gas companies has been relatively low in recent years.But the amount of UK tax paid by oil and gas companies has been relatively low in recent years.
The National Audit Office points out that in some years the government paid more to oil and gas companies in tax relief than it received from them in taxes.The National Audit Office points out that in some years the government paid more to oil and gas companies in tax relief than it received from them in taxes.
This is because they spent enough money on things like decommissioning North Sea oil platforms to cancel out any profits they were making in the UK.This is because they spent enough money on things like decommissioning North Sea oil platforms to cancel out any profits they were making in the UK.
BP's reports for 2015 to 2020 all show overall refunds, which means it received more money back from the UK government than it paid.BP's reports for 2015 to 2020 all show overall refunds, which means it received more money back from the UK government than it paid.
Shell has similar reports. It made overall payments to the UK government in 2017 but was negative for the rest of the period, as well as in 2021.Shell has similar reports. It made overall payments to the UK government in 2017 but was negative for the rest of the period, as well as in 2021.