Chancellor Rishi Sunak announced a windfall tax on oil and gas company profits

By Suzanne Evans, Director, Political Insight

Chancellor Rishi Sunak did indeed announce a windfall tax on oil and gas company profits yesterday to part-fund an additional £15bn to mitigate the impact of rising energy prices, bringing his total support package to £37bn, or around 1.5% of GDP.
 
What does it mean for households? The huge U-turn will see more than 8 million households on the lowest income will £650 to help them with rising energy bills, at a cost of £5bn. Other households will get £550. 8 million pensioner households will additionally get a one-off payment of £300, and those on disability benefits an additional £150. The £200 payment Sunak announced in February to help every energy bill payer will be increased to £400 and will become a grant that does not need to be repaid, as opposed to a loan. The package means that almost all of the eight million most vulnerable households in Britain will receive at least £1,200 of support, including a £150 council tax rebate which has already been announced. A further £500 million will be allocated to the fund administered by councils to help households facing extra hardship, the Chancellor said.
 
What does it mean for energy companies? What the Chancellor called an “energy levy” in his speech yesterday – he did not use the words “windfall tax” - will temporarily target energy profits and be an additional 25% levy. Energy companies already pay 40% of their profits in tax but will now pay 65% until December 2025. However, the amount companies pay will also be linked to how much they invest. It will include a new investment allowance, a “super-deduction” of 91p of tax savings for every £1 committed to fresh capital expenditure. In the past companies only received 46p in tax relief for every £1 invested in the UK. Sunak said the energy levy may be phased out before 2025 if oil and gas prices return to more ‘normal levels,’ although when PA Media contacted the Treasury, the department refused to clarify what these normal levels are. Sunak expects the tax to raise around £5 billion a year.

Responses to the new energy levy:

• City economists warned that the chancellor’s offering £400 of support for even the wealthiest bill-payers risked fuelling already high rates of inflation. “The consequence of easing the pain now may be worse pain later on,” said Kallum Pickering, senior economist at Berenberg, told The Guardian. However, Sunak claimed in an interview with Sky News following his announcement that his support package would have less than 1 percentage point impact on inflation. Asked about a possible windfall tax on electricity generators in the same interview, he referred to his statement on Thursday, which said the government was looking at profits in the industry. "What we want to do, and we are going to do urgently is understand the scale of those profits, and then decide on the appropriate next steps," he said.

• “The tax will only apply to profits generated in the UK. The bulk of BPand Shell’s earnings come from operations in other countries, and both companies have scarcely paid any corporation tax in Britain since 2015 because of losses tied to investments in North Sea fields, or dismantling old platforms out at sea. The new levy won’t allow companies to offset such expenses against their tax bill,” Bloomberg says.

• BP Plc put out a statement saying it will “look again” at its plans in the UK. “Today’s announcement is not for a one-off tax -– it is a multiyear proposal,” BP said. “We will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.” The British oil giant has said previously that planned investments of £18 billion in the country by 2030 were not contingent on whether or not the government raised taxes. Shell Plc, which recently moved its HQ to London from The Netherlands, said that “a stable environment for long term investment” was fundamental to its plan to invest as much as £25 billion into the UK’s energy system in the next decade. “The chancellor’s proposed tax relief on investments in Britain’s energy future is a critical principle in the new levy,” a spokesperson said. EnQuest Plc, which produces more than 90% of its oil and gas in the UK, said it was “disappointed with the implementation mechanics” of the new levy. Industry body Offshore Energies UK (OEUK) said in a statement: “The new taxes imposed on the UK’s offshore oil and gas operators are a backward step by a government which, just weeks ago, was pledging to build a greener and more energy-independent nation”. “This is the exact opposite of what was promised in the British energy Security Strategy published just last month,” it added. “(The levy) will drive away investors and so reduce UK energy production. That means less oil, less gas and less renewables. It also makes it much harder for the UK to reach net zero by 2050,” OEUK boss Deirdre Michie added in interviews later.

• Bloomberg reports JP Morgan’s Managing Director for Global Energy, Christyan Malek, who said that the major risk to the UK North Sea oil and gas industry is that international companies such as BP and Shell, which are scaling back fossil-fuel investments in favour of low-carbon energy, see the UK as less attractive following this announcement. A windfall tax “creates unpredictability for projects that take years to develop,” Malek said. The Guardian also reports industry sources as saying that while the investment allowance was generous, the process of getting new licences and hiring oil rigs meant the tax regime might have finished by the time new projects have been approved.

• Some Tory backbenchers objected to the levy, with Richard Drax MPaccusing Sunak of “throwing red meat to socialists”, while MP Craig Mackinlay said: “Higher taxes can never mean lower prices. All in all, I’m disappointed, embarrassed, and appalled that a Conservative chancellor could come up with this tripe.”

• The policy was welcomed by the Institute for Fiscal Studies and the Institute for Public Policy Research (IPPR), although the later said more was needed. Rachel Statham, IPPR associate director for work and the welfare state, said: "This is a living standards crisis of historic proportions… We need to see support that can keep families afloat not just this year, but into the future.”

• Ami McCarthy, political campaigner for Greenpeace UK, said: “This is utter stupidity. Rewarding oil and gas extraction while doing nothing to encourage investment in renewables will not provide energy security, push bills even higher and pour fuel all over the climate crisis.” She added the government should instead be investing in green energy and home energy saving measures such as insulation.

• The Confederation of British Industry said the new energy levy will be "damaging" for the UK's net zero plans and for energy security.

 
In an interview with Martin Lewis, founder of the Money Saving Expert website, Rishi Sunak “categorically” denied he did not time announcing the windfall tax and new support package to deflect from the controversy over Downing Street lockdown parties.
 
United Voices of the World (UVW), a union which represents cleaners and security guards in government buildings, has called a protest outside Downing Street today in response to Sue Gray’s ‘Partygate’ report, which laid bare accounts of excessive drinking, members of staff fighting and one vomiting, and red wine spilt on the wall and a printer at the Downing Street Christmas party on December 18^th 2020, the aftermath of which cleaners had to deal with. Petros Elia, UVW general secretary, said: “We’re not in the least bit surprised by the revelations in the Sue Gray report. We have thousands of members who work as cleaners and security guards and these workers face disrespect and discrimination on a daily basis in offices and government buildings across London, not just in Downing Street. It is outrageous to have rowdy and illegal parties during the pandemic but to then expect cleaners to mop up after you and to pay them, as well as porters and security guards, poverty wages and deny them full sick pay is abhorrent.
 
Passenger trains could be blocked from station platforms by parked freight services during strikes, an industry leader has warned. John Smith, chief executive of firm GB Railfreight, told the PA news agency the measure may be required if a skeleton timetable is implemented during industrial action. Fears have been raised that staff walkouts could lead to much of the rail network being closed, affecting petrol and diesel supplies and the delivery of goods to shops.
 
Workers at telecoms giant BT are to be balloted for industrial action in a dispute over pay. Members of the Communication Workers Union (CWU) at BT Group, which includes BT, Openreach and EE, will start voting in mid-June, with the result expected by the end of the month. CWU members have unanimously rejected the offer of a £1,500 flat rate pay rise, the union said.
 
The government is to examine French billionaire Patrick Drahi's increased stake in BT over national security concerns. Drahi's company, Altice, increased its investment from 12% to 18% in December, prompting speculation the firm could face a takeover bid. Business Secretary Kwasi Kwarteng will now probe the move using new powers under the National Security and Investment Act 2021. BT said it would co-operate with the review.
 
Rapid charging an electric car has become a fifth more expensive in eight months due to soaring energy prices, RAC analysis has found. The average price of using a public rapid charger has gone up from 36.7p per kilowatt hour (kWh) in September last year to 44.6p per kWh this month, adding £4 to the typical cost of completing an 80% rapid charge of a family-sized electric vehicle with a 64kWh battery.
 
Tata Motors, the Indian owner of Jaguar Land Rover (JLR), is threatening to shift electric car production to Slovakia if ministers refuse to offer taxpayer support for a UK gigafactory. Tata has held talks with foreign battery makers Northvolt and SVolt Energy Technology amid a deadlock over state backing for a plant in the UK, which is key to its plans to go all-electric by 2025. Many of JLR's 30,000 UK jobs could be at risk if it opts for Slovakia instead, The telegraph says, but reports government sources as suggesting that the proposals were a negotiating tactic “to extract more money from the Government."
 
Stagecoach has sealed a £20 million deal to buy Kelsian Group’s east London bus operations, PA Media reports. The deal includes a deport at Lea Interchange, bought for an initial £10 million, followed by £1 million each year for 10 years after the move is completed. Kelsian’s east London operation operates 11 contracts on behalf of Transport for London (TfL), using a fleet of around 150 buses. It has an annual turnover of around £38 million.

Customers are buying fewer items and turning to cheaper products after witnessing a plunge in their household incomes, the chair of Asda has warned. Lord Stuart Rose told the PA news agency that the supermarket group’s shoppers are “making desperate decisions about spending” as the cost-of-living crisis continues to bite. Some customers are “saying they can only spend £40 in a shop and will put anything back if it comes over that,” he said.

The EU is said to be drawing up plans to ration gas supplies in case the bloc is cut off completely by Russian President Vladimir Putin. EU Energy Commissioner Kadri Simson said the region was racing to store as much gas as possible and could replace most of Russia’s deliveries this year but would have to do more if there were any “full disruption” of supplies. The plans being drawn up would include rationing gas to industry, but households would be spared, the Financial Times reports.

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