What is a windfall tax and how will it work?  - Telegraph

What is a windfall tax and how will it work? – Telegraph

How will it work?

Sunak is offering a provisional 25% of Levi’s Energy Dividends to reflect the “extraordinary profits” earned by oil and gas companies.

They now face an overall main tax rate of 65%, which is a combination of corporate tax – currently at 19% – current surcharges and a windfall profit tax. This stands much higher than companies in other sectors that currently pay the 19 percent corporate tax. Some sectors have additional fees, such as an additional 8 piece bank fee.

The new tax will only affect profits made after May 26, 2022, and will be “phased out when oil and gas prices return to historically normal prices.”

Official documents accompanying the declaration say it could run until 2026, with the condition that the tax be removed on December 31, 2025.

It is expected to raise around £5 billion in its first year, according to the Treasury, and will be accounted for “in a similar way” to existing corporate tax. It will not apply to the electricity generation sector.

The tax also includes an investment allowance, which will try to incentivize these energy companies to spend the money by offering a tax break of 91p for every £1 they invest.

In theory, oil and gas companies that ramp up their investments significantly would give them significant amounts of relief, which could partially offset the treasury’s surge from the windfall tax.

How does the tax work in other countries?

This is not unprecedented. Other countries have previously resorted to imposing unexpected taxes to relieve pressure on household budgets.

Last September, when gas prices first rose, Spain’s leftist Pedro Sanchez government announced a surprise €3bn (£2.6bn) tax on energy companies’ “excess profits” to help pay tax cuts to consumers.

Italy also imposed additional taxes on utility profits. Last month, it announced an unexpected 10 percent tax on some energy companies to fund household help as the country relies heavily on Russian gas.

What did the UK do before?

Nor is it the first time the UK Treasury has come up with a crackdown on companies with ballooning profits.

In 1997, then-Chancellor Gordon Brown announced a windfall tax on “excess profits” for utilities after they had been privatized by previous Conservative governments. It was aimed at correcting the “bad bargain customers and taxpayers got from privatizing utilities”.

The £5 billion raised was used to fund a welfare-to-work scheme known as the New Deal, which aims to reduce unemployment.

Meanwhile, in 1981, Margaret Thatcher imposed a windfall tax of 2.5 percent on banks as interest rates rose. It raised £400 million, which is about £3 billion in today’s money.

What do critics say?

Opponents of the unexpected tax warn that it could derail investment at a time when the United Kingdom is trying to increase spending to support the country’s energy supply in the wake of Putin’s war.

Bernard Looney, BP’s chief executive, said the windfall tax “would not stimulate further investment” and many ministers agreed. In March of this year, Kwasi Karting warned that the plans would be a “job tax, which will destroy investment and increase uncertainty in the oil markets.”

Earlier this month, the business secretary added that the tax was “meaningless” if Britain wanted to encourage investment in the North Sea and had domestic energy supply sources.

Many fear that it may also send a bad signal to foreign investors if they think bumper profits can be targeted in the future.

Critics also highlight that pensioners often benefit from the profits of oil giants in which pension funds own stakes.

This article is updated with the latest information.

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