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Energy prices: What is a windfall tax and how would it work? Energy prices: How will the £5bn windfall tax work?
(1 day later)
Prime Minister Boris Johnson has said "no option is off the table" in response to calls for a windfall tax on oil and gas companies. Chancellor Rishi Sunak has announced a windfall tax on energy firms that could raise around £5bn.
Opposition parties are calling for a one-off tax after BP and Shell both reported big increases in profits as oil and gas prices surge around the world. UK energy firms will now pay an additional 25% tax for the next 12 months.
The calls for such a tax were amplified when BP and Shell both reported big profits increases as global oil and gas prices surged.
How high could my energy bills go?
BP profits soar as calls for windfall tax growBP profits soar as calls for windfall tax grow
Shell profits nearly triple as oil prices surgeShell profits nearly triple as oil prices surge
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..
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.
Companies that get oil and gas out of the ground are getting much more money for it than they were last year, partly because demand has increased as the world emerges from the pandemic and partly because of supply concerns due to Russia's invasion of Ukraine. Energy firms are getting much more money for their oil and gas than they were last year, partly because demand has increased 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. Which countries are doing the most to tackle energy bills?
How countries are dealing with rising prices How will the new windfall tax work?
The chancellor described the new tax as a 25% Energy Profits Levy.
The important feature of this extra tax is that any money the companies may have lost in previous years, or money they are spending on things like decommissioning North Sea oil platforms cannot be used to reduce the amount of tax they pay.
In recent years, such methods have meant that BP and Shell, for example, have paid almost no tax in the UK.
How much have the energy companies been making?How much have the energy companies been making?
BP's underlying profit more than doubled to $6.2bn (£4.9bn) in the first three months of the year, although this was cancelled out by money written off as a result of its decision to exit from its investments in Russian oil firms following the invasion of Ukraine. BP's profits more than doubled in the first three months of the year while Shell's profits nearly tripled.
Shell's profits nearly tripled in the same period $9.13bn (£7.3bn), its biggest ever quarterly profit. But the firm said that pulling out of Russian oil and gas had cost it $3.9bn (£3.1bn). But both also wrote off a lot of money as a result of exiting from investments in Russian oil firms following the invasion of Ukraine.
BP and Shell have both spent billions 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.BP and Shell have both spent billions 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 have politicians being saying?
What are politicians saying? The government has now adopted the policy, having previously rejected it. A windfall tax had been championed by Labour, Liberal Democrats and the SNP.
Although Mr Johnson has previously said a windfall tax would deter investment, the government is not ruling one out if firms do not invest enough in new projects. Chancellor Rishi Sunak has said he is not "naturally attracted" to the policy, but is "pragmatic" about introducing it. The prime minister had previously said such a tax would deter investment: "I don't like them. I don't think they are the right way forward. I want those companies to make big, big investments."
Kwasi Kwarteng, the business secretary has said: "I've never been a supporter of windfall taxes."
Chancellor Rishi Sunak had previously said he was not "naturally attracted" to it, but was "pragmatic" about introducing it.
We cannot rule out a windfall tax, says ministerWe cannot rule out a windfall tax, says minister
Rishi Sunak threatens energy firms with windfall taxRishi Sunak threatens energy firms with windfall tax
Labour, the Liberal Democrats and the SNP all back the measure. Critics of a windfall tax point out that it might affect the money paid out to pensioners by some pension funds - as these funds benefit from the profits of big oil companies.
Critics of a windfall tax point out that it might affect the money paid out to pensioners by some pension funds - as these funds benefit from the profits of big oil companies. If private pension funds own shares in them, they get some of the profits through dividends. But it is important not to overstate the impact of this. Pension funds invest across countries, industries and indeed between things like shares and bonds, so a tax on a few large companies would be unlikely to make a noticeable difference to them.
But it is important not to overstate the impact of this. Pension funds have diverse holdings across countries, industries and indeed between things like shares and bonds, so a tax on a few large companies would be unlikely to make a noticeable difference to them.
Would a windfall tax affect investment?Would a windfall tax affect investment?
BP plans to spend a maximum of £18bn on the UK's energy system by the end of 2030.BP plans to spend a maximum of £18bn on the UK's energy system by the end of 2030.
Chief executive Bernard Looney was asked by The Times on 3 May which of BP's planned UK investments would not go ahead if there were a windfall tax.Chief executive Bernard Looney was asked by The Times on 3 May which of BP's planned UK investments would not go ahead if there were a windfall tax.
Bernard Looney replied: "there are none that we wouldn't do."Bernard Looney replied: "there are none that we wouldn't do."
Shell plans to spend £20-25bn on UK energy over the next 10 years.Shell plans to spend £20-25bn 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 UK's best-known windfall tax was in 1997, when Labour Chancellor Gordon Brown placed the tax on companies formed after the Conservative governments' earlier privatisation of nationalised industries, including BT, Scottish Power and United Utilities. The UK's best-known windfall tax was in 1997, when Labour Chancellor Gordon Brown placed the tax on companies formed after the Conservative governments' earlier privatisation of nationalised industries, including BT, Scottish Power and United Utilities.
The tax raised £5.2bn over two years (£8.7bn in today's money) according to the Institute for Fiscal Studies.The tax raised £5.2bn over two years (£8.7bn in today's money) according to the Institute for Fiscal Studies.
Conservative Chancellor Geoffrey Howe imposed a similar levy on banks in 1981, arguing they had benefited from high interest rates. He also imposed a special tax on North Sea oil and gas firms.Conservative Chancellor Geoffrey Howe imposed a similar levy on banks in 1981, arguing they had benefited from high interest rates. He also imposed a special tax on North Sea oil and gas firms.
1997: Gordon Brown announced a windfall tax in his first budget1997: Gordon Brown announced a windfall tax in his first budget
How much tax do oil companies pay?How much tax do oil companies pay?
Oil and gas firms operating in the North Sea are already taxed differently to other firms. Oil and gas firms operating in the North Sea were already taxed differently to other firms.
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. Taxes on their profits are higher - they pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other firms pay corporation tax at 19%.
They pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other firms pay corporation tax at 19%. But the amount they have actually paid in the UK recently has been low. 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.
But the amount of UK tax oil and gas companies pay has been relatively low in recent years. BP and Shell both received more money back from the UK government than they paid every year from 2015 to 2020 (except 2017, when Shell paid more than it received).
The National Audit Office points out that in some years the government - and taxpayers - paid more to them in tax relief than they paid 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.
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 says it made overall payments to the UK government in 2017 but was negative for the rest of the period, as well as in 2021.