What is a windfall tax and could the UK introduce one?

Boris Johnson is under growing pressure to implement a one-off windfall tax on oil and gas producers in a bid to cut energy bills.

MPs are due to have their say on the issue on Tuesday as Labour seeks to force a Commons vote on its amendment which "expresses regret" at the omission of the policy from the Queen’s Speech earlier this month.

It comes as MPs debate “tackling the short-term and long-term cost of living increases”.

BP and Shell have recorded bumper profits in the last year,

In February, BP's finance director said it was possible the company was raking in "more cash than we know what to do with"

Meanwhile, in April Ofgem's energy price cap increased by 54%, driving up the annual household bill by £693, due to rises in the wholesale cost of gas.

According to the Office for National Statistics (ONS), 40% of Brits are now struggling to pay their energy bills.

What is a windfall tax?

Windfall taxes are a form of one-off taxation that can be placed on companies if they make unexpected profits from circumstances beyond their control.

Geopolitical issues - such as a surge in demand for energy as lockdowns ease globally, or Russia's invasion of Ukraine - have pushed up oil prices, driving up profits.

A windfall tax implemented by the government would target this extra money.

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Will the UK introduce a windfall tax?

For months the government has resisted a windfall tax, claiming it could deter investment in green infrastructure by energy companies at a time the UK is trying to become less reliant on Russian hydrocarbons and aiming for net-zero.

However, Rishi Sunak signalled he may be open to one.

The chancellor told the BBC he is not “naturally attracted” to a windfall tax, but he would be “pragmatic about it” in light of the vast profits recorded this year.

Other countries have implemented windfall taxes on oil giants to help with rising energy bills, such as Italy - who hiked theirs from 10% to 25% in May after introducing one in January.

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What are the energy companies saying?

BP on Tuesday indicated that a windfall tax would not necessarily deter their decisions to provide cash for green infrastructure.

The chief executive told the Times "there are none that we wouldn't do" when it comes to their green plans if a windfall tax were to be introduced.

At present, BP say they will spend £18bn over eight years on green energy - including on wind farms and electric car charging points.

What do experts think?

On Wednesday Dr Miatta Fahnbulleh, chief executive at the New Economics Foundation (NEF), said introducing the tax now is "an absolute no brainer" when oil giant profits are so high.

"We should be asking them to take a hit in order to help people who literally eating one meal a day and not heating their homes," Fahnbulleh told LBC.

Paul Johnson, director at the Institute for Fiscal Studies, in March said generally windfall taxes are "not a great idea" - but the case is "relatively strong" given the current circumstances.

"Putting in place windfall taxes willy nilly can create problems for investment and certainty," said Johnson.

He added: "A much better policy would have been to make it clear that the tax rate would rise at a point when profits or prices went above a particular level."

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Where does each political party stand on the issue?

The main opposition parties are united in calls for a windfall tax.

Labour has said it would knock £200 off the average household energy bill, and up to £600 for those on the lowest incomes, by introducing a windfall tax.

Ed Miliband, shadow climate change and net-zero secretary, said of Tuesday’s vote: “As energy bills rise by record amounts for millions of families, it is shameful that Boris Johnson and Rishi Sunak still refuse to back a windfall tax that could help tackle the cost-of-living crisis."

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The Scottish National Party (SNP) has called for a "broad-based" windfall tax on the excess profits of major companies to fund a package of support for families and tackle the rising cost of living.

The Liberal Democrats have called for a "Robin Hood tax" on oil and gas firms seeing record profits to give over seven million households £300 off their energy bills this year.

And the Green Party is also calling for a windfall tax to help Brits struggling with the cost of living.

Watch: Environment secretary: Tax on oil industry may deter North Sea investments