What is a windfall tax and will the government impose one on energy companies such as Shell?

·3 min read
A Shell logo at a petrol station (AFP via Getty Images)
A Shell logo at a petrol station (AFP via Getty Images)

There have been calls for a windfall tax to be imposed on energy companies following Shell reporting an adjusted profit of $9.1 billion (£7.2billion)--$1 billion ahead of forecasts and up from $3.2billion in the same time last year.

As energy prices rise, households are struggling with more expensive bills while energy companies profit.

Politicians are calling for the government to impose a windfall tax on energy companies, because the money raised could be used to ease the cost of living crisis.

Chancellor Rishi Sunak is expected to announce a windfall tax today, as he is set to unveil a support package to help soaring bills.

But what is a windfall tax and what has the government said about it before?

What is a windfall tax?

The word “windfall” means “a large amount of money that is won or received unexpectedly.”

A windfall tax is a one-off tax that the government imposes on a company or a group of companies when they benefit from something that happened outside of their control.

Energy companies are benefiting from the increased demand for energy following the pandemic and Russia’s invasion of Ukraine.

Who is calling for a windfall tax?

Philip Evans, Greenpeace UK’s oil and gas campaigner, is calling for a windfall tax, and said: “By using a big chunk of the bloated profits that Shell, BP and others are raking in to make homes warmer, more energy efficient and kitted out with heat pumps, the government could start to really tackle the climate and cost of living crises simultaneously.”

Ed Miliband, the Shadow Secretary of State for Climate Change and Net Zero, said: “Another day, another oil and gas company making billions in profits, and yet another day when the government shamefully refuses to act with a windfall tax to bring down bills.”

Liberal Democrat Leader Ed Davey said on BBC Breakfast: “The Conservative government’s refusal to introduce a windfall tax on the super profits of oil companies is becoming impossible to justify.

“BP is raking in eye-watering profits while millions of people struggle to pay the bills. It is an unforgivable lack of leadership from Boris Johnson at a time of national crisis. Oil companies are handing out huge dividends and buying back shares, they could easily afford to pay a little more to help the most vulnerable.”

Protesters shut 40 of Shell’s London garages

What has the government said about a windfall tax?

Sunak had previously said that he is not “naturally attracted” to a windfall tax but would be “pragmatic about it.” He is expected to crave to pressure to impose a windfall tax in his announcement today.

However, Prime Minister Boris Johnson previously told ITV’s Good Morning Britain that a windfall tax would “discourage them from making the investments that we want to see that will, in the end, keep energy price prices lower for everybody”.

Johnson said: “We have a short-term hit caused by the spike in energy prices across the world. If we respond by driving up prices and costs across the board in this country, responding by the government stepping in and driving up inflation, that will hit everybody.

“And that will mean that people’s interest rates on their mortgages go up, the cost of borrowing goes up, and we face an even worse problem.”

According to The Independent, a Treasury spokesperson said: “Oil and gas companies in the North Sea are already subject to a tax rate on their profits that is more than double those paid by other businesses. To date, the sector has contributed more than £375 billion in production taxes.”

Chancellor Rishi Sunak previously told Mumsnet that introducing a windfall tax is still a possibility, saying: “What I would say is that if we don’t see that type of investment coming forward and companies are not going to make those investments in our country and energy security, then of course that’s something I would look at and nothing is ever off the table in these things.”

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