What is a windfall tax and what does it mean for me?

Liz Truss speaks during her first Prime Minister’s Questions sessions (PA Wire)
Liz Truss speaks during her first Prime Minister’s Questions sessions (PA Wire)

Liz Truss has she ruled out a new windfall tax on oil and gas companies as a way of easing the cost-of-living crisis.

In her first Prime Minister’s Questions on Wednesday, Ms Truss told the Commons: “I am against a windfall tax. I believe it is the wrong thing to be putting companies off investing in the United Kingdom just when we need to be growing the economy.”

In May, then-chancellor Rishi Sunak announced that a £5bn temporary windfall tax of 25 per cent on oil and gas companies would help fund a £15bn package of assistance for struggling households.

He said almost all of the 8m of the worst-off households would get support measures including a £650 cost-of-living payment for families on benefits, a one-off £300 payment to pensioner households and £150 each to 6m disabled people.

He also doubled help with energy bills on offer to all households this autumn from £200 to £400 and converted the payment from a loan to a grant.

So what is a windfall tax?

A windfall is a sum of money you receive unexpectedly or by luck, for example if you won the lottery.

A windfall tax is a one-off levy on the profits of companies that are seen to be unreasonably high and raised through good fortune.

There have been calls from opposition parties, and some Conservative politicians, for the government to impose a windfall tax on oil and gas producers.

That’s because these energy giants have recently reported bumper profits thanks to surging oil and gas prices pushed to record highs by Russia’s invasion of Ukraine, as well as pumped-up demand as economies emerge from the Covid pandemic.

Earlier this month, Shell reported nearly £7.3bn in first-quarter profits, while BP posted its highest underlying profit in more than a decade.

What has the government said so far?

The government had resisted calls for a windfall tax, so the announcement was a U-turn.

The government had argued that a one-off levy could deter future investment by firms, risking the security of the country’s energy supply, as well as almost 200,000 jobs that rely on the industry.

BP, for example, has announced plans to invest up to £18 billion in Britain this decade, while Shell has also said it aims to invest up to £25 billion in the UK energy system.

However, the government’s rationale was tested this month after BP and Shell signalled commitment to investing in the UK despite calls for a tax.

BP’s chief executive Bernard Looney told The Times his company would continue with plans to invest up to £18bn even if the government introduced a one-off levy.

Shell’s CEO Ben van Beurden later said his company has a “very strong commitment” to investing in the UK if it makes “economic sense”.

Is a windfall tax popular?

Almost two-thirds – 63 per cent – of the UK public support the idea of a one-off levy on energy giants, according to a new poll shared exclusively with The Independent.

Sixty-six per cent of those who voted for the Conservative Party in the 2019 election said they were in favour of a windfall tax, the same proportion of those who voted for the Labour Party, according to the poll commissioned by environmental think tank Green Alliance.

Only seven per cent of those polled opposed the tax, while 30 per cent said they neither opposed nor supported it or didn’t know.

Has a government ever imposed a windfall tax before?

Yes. In 1997, then Chancellor Gordon Brown imposed one on the profits of utility companies after they were privatised by previous Conservative governments.

Then Labour MP Geoffrey Robinson said at the time that the tax “puts right the bad deal which customers and taxpayers got from the privatisation of the utilities”.

This would not be the first time that a Conservative government has imposed such a tax either.

In 1981, Conservative Chancellor, Geoffrey Howe, introduced a one-off levy on banks. Later in his term, he also imposed a tax on North Sea oil firms.

Have any other European countries imposed a windfall tax this year?

Italy and Spain have already announced windfall taxes on energy company profits.

Introducing the measure, Italy’s Prime Minister Mario Draghi said it would help people cope with the cost of living, which he said was hurting most Italians.

What would it mean for me?

Eight million people on the lowest income households will be sent a one-off payment of £650.

Pensioners will receive a one-off £300 payment, while there will also be a one-off disability cost of living payment of £150.

Mr Sunak has also scrapped the £200 energy bills loan in favour of a grant of £400 which will not have to be paid back.