Windfall Tax – What It Is & Why It Needs To Be Increased

With the cost-of-living crisis wreaking havoc on the majority of the UK public, the term windfall tax has been in constant circulation. Due to Russia’s invasion of Ukraine, as well as a slow recovery from the pandemic, energy prices have increased. This has caused much anxiety for the average person. As a result of this, energy giants such as Shell and BP have announced record soaring profits. BP made £7.1bn worldwide between July and September, whilst Shell announced worldwide profits of £8.2bn for the same period. This has directly resulted in both companies increasing their dividend payments (money given to shareholders).

Together with the call for an increase in use of renewables, a windfall tax is being demanded by large numbers. In May 2022, a windfall tax was actually introduced on the UK gas and oil sector. The windfall tax was expected to raise £5 billion within its first year. However, this has exceeded expectations due to higher profit records. It is now estimated that the levy will bring in revenues roughly 50% higher at £7.7 billion in the 2022-23 tax year.

Despite this, the UK taxpayer continues to suffer with energy bill increases. This will likely force thousands into poverty and many to choose between eating or heating this winter. We break down exactly what the windfall tax is and why it’s been increased to benefit the public…

What Is The Windfall Tax?

A windfall tax is a tax imposed by a government on a company. A windfall tax works by targeting businesses and organisations fortunate enough to have benefitted from something they were not responsible for. The then Chancellor, Rishi Sunak, announced a windfall tax in May 2022, labelled as the ‘Energy Profits Levy’.

Under this levy, a 25% tax on profits made from extracting oil and gas was introduced. However, other activities such as refining oil and selling petrol and diesel on forecourts were not included. What’s more, energy giants Shell has stated they are not expected to pay any windfall tax this year. This is because its investments in the North Sea meant it did not count as having made any UK profits. BP have stated they are expected to pay $800 million in windfall tax this year.

The windfall tax does not apply to companies which generate electricity from sources such as nuclear or wind power. Energy companies such as these have been recording higher profits due the price of this electricity correlated to gas prices. It’s worth noting that oil and gas firms operating in the North Sea pay more corporation tax than other businesses. Firms pay 30% corporation tax on their profits as well as a further supplementary 10% rate on top of that. The corporation tax rate for other businesses lies at 19%.

Does The Windfall Tax Need To Be Increased?

The Chancellor, Jeremy Hunt, has recently admitted that the UK’s finances feature a £55bn black hole. This is a huge debt to recover at a time when the economy looks incredibly weak. During the Autumn Budget 2022 as predicted, the Chancellor Jeremy Hunt announced that the Energy Profits levy would be increased to 35%, up 10% from the current 25% rate. It will also be extended to run until 2028 instead of 2025 as currently scheduled, and will include electricity generators. This is expected to raise an extra £45bn over the next five years.

A combined windfall tax globally on the combined profits of the largest oil and gas firms is being called for. This would bring in an estimated $100bn in the first 3 months of 2023. Much of this cash can be used to change energy infrastructure across the most polluting nations which will go some way in supporting the need to keep global warming below 2°C.

What More Needs To Be Done To Tackle Climate Change?

It’s widely believed by many that more needs to be done to tackle climate change for the greater good. Since the landmark 2021 Cop26 UN climate summit in Glasgow, nations have only promised 1/50th of what is needed in order to keep global warming to a preferred 1.5°C. The severity of climate change is evidenced by every single continent experiencing freak weather disasters. This includes floods in Pakistan, heatwaves in Europe, and forest fires in Australia. The richest countries in the world account for just one in eight people globally, however they are responsible for half of greenhouse gases.

According to a recent report commissioned by the UK and Egyptian government, developing countries will need $2tn a year in climate funding by 2030. The cash will be needed so that poor countries can switch away from fossil fuels, invest in renewable energy and other low-carbon technology, and cope with the impacts of extreme weather. By funding low-carbon economic growth in poor countries, it would help to lift billions of people out of poverty, create jobs and reduce greenhouse gas emissions.

We hope this has outlined to you what the windfall tax is and why this needs to be increased in order to support the UK public through the cost-of-living crisis, as well as improve climate change across the world. If you’d like to know any further information on anything mentioned, or anything accounting related for that matter, please do not hesitate to get in contact with us at Nordens, where one of our trusted advisors would be happy talking you through your query.