What is a windfall tax? Meaning of levy, will it help cost of living - what has Rishi Sunak and Liz Truss said

Mr Sunak announced a £5bn windfall tax on North Sea oil and gas producers in May to help pay for support for households struggling with rising energy bills

The former Chancellor Rishi Sunak announced a significant package to ease the cost of living crisis on Thursday (26 May) and it included a windfall tax, making a firm U-Turn on the Conservative Party’s stance on the levy.

He announced a £5bn windfall tax on North Sea oil and gas producers in May to help pay for support for households struggling with rising energy bills.

Sir Keir Starmer previously argued a U-turn is “inevitable” as the tax on North Sea firms would “raise billions of pounds, cutting energy bills across the country”.

However, as Sunak and Liz Truss battle it out to become the next Prime Minister following Boris Johnson’s resignation, Ms Truss has rejected suggestions of another windfall tax on the profits of energy companies.

Here we explain what the windfall tax is, what both Sunak and Truss has said about it, and how it could help ease soaring energy bills.

What is a windfall tax?

A windfall tax is a one-off levy imposed by the Government on a company or group of businesses that have unexpectedly benefited from something outside of their control - in this case a surge in oil and gas prices.

Chancellor Rishi Sunak leaves Downing Street on Thursday

Spain and Italy have already announced a windfall tax on energy companies.

Labour has proposed a year-long increase in oil and gas producers’ corporation tax of 10 percentage points.

The party has said this would raise £1.2 billion.

How will the levy work?

The Government said it would raise £5 billion from the windfall tax it announced on oil and gas companies on Thursday, but it left a back door for companies to avoid much of the charge if they invest in new oil.

Energy companies already pay 40% of their profits in tax, but the extra levy announced by Chancellor Rishi Sunak will bring this up to 65% until December 2025.

The added tax bill might also be phased out before then if oil and gas prices return to more normal levels, although when contacted the Treasury refused to say what these normal levels are.

But companies can also avoid almost all their tax bill after the Chancellor doubled the relief they can get for investing in new oil and gas extraction.

“Like previous governments, including Conservative ones, we will introduce a temporary targeted energy profits levy, but we have built into the new levy … a new investment allowance similar to the super-deduction that means companies will have a new and significant incentive to reinvest their profits,” Mr Sunak said.

What has Liz Truss said about the tax?

Truss said a further windfall tax would “send the wrong message” to the world, adding that the government should be encouraging Shell and other companies to invest in the UK.

On Thursday evening (28 July) Truss was asked whether she favoured another windfall tax.

She replied: “I don’t believe in windfall taxes . . . What we should be doing is encouraging Shell and other companies to invest in the UK because we need to get our productivity up.

“We need capital investment.”

She added: “What I would do is create low tax investment zones, encouraging those companies to invest in our country.

“I think windfall taxes send the wrong message to the world.”

Her comments came after Centrica, a British electrical services company, reported operating profits of £1.3bn in the first six months of 2022 - compared with £262m in the same period last year.

Centrica chief executive Chris O’Shea called on the government to provide more support to households to cope with rising energy bills, acknowledging some of the company’s customers were “struggling”.

Could it help with cost of living?

The idea of the tax is that the money raised could be spent on easing the cost of living crisis for those households most under pressure.

Labour had repeatedly argued that a one-off  year-long windfall levy could raise £1.2 billion to fund discounts on home energy bills.

The party proposed levying an extra 10% on the corporation tax paid by oil companies that are active in the North Sea.

This would not only affect well-known firms such as BP and Shell but also lesser-known ones such as Harbour Energy – which actually produces more oil from the North Sea than any other extractor.

What has Rishi Sunak previously said about a windfall tax?

Mr Sunak previously ruled out a windfall tax.

He had told Mumsnet that he was concerned a windfall tax could put off investment in new oil and gas extraction, but added: “If we don’t see that type of investment coming forward and companies are not going to make those investments in our country and energy security, then of course that’s something I would look at.”

His comments in an interview with the Mumsnet website came just hours after the Prime Minister and Deputy Prime Minister had both dismissed the tax.

Mr Sunak said companies reaping large sums thanks to the increase in wholesale gas and oil prices needed to step up and reinvest to make the UK less reliant on foreign power.

He said: “If we don’t see that type of investment coming forward and if the companies are not going to make those investments in our country and in our energy security, then of course that’s (a windfall tax) something I would look at.”

The idea of a windfall tax had faced resistance in Government, with Mr Sunak himself among ministers to warn about the impact it would have on future investment.

But the Chancellor said his plan for a 25% energy profits levy would be coupled with a new incentive, almost doubling the tax relief available on investment.

Who was against the tax?

Mr Johnson told Good Morning Britain on Tuesday (3 May): "If you put a windfall tax on the energy companies what that means is that you discourage them from making the investments that we want to see that in the end will keep energy prices lower for everybody.”

Meanwhile, Business Secretary Kwasi Kwarteng told Sky News: “I’ve never been a supporter of windfall taxes.

“I have been very clear on that publicly, I think it discourages investment and the reason why we want to have investment is because it creates jobs, it creates wealth and it also gives us energy security.”

Mr Kwarteng added: “He is the chancellor of the exchequer, he is responsible for tax policy.

“From my point of view, I want to see investment in the North Sea.”

Brexit opportunities minister Jacob Rees-Mogg argued it is wrong to raid the “honey pot of business” and the measure would ultimately see the public pay more tax.

What have opposition parties said?

Labour’s Sir Keir Starmer had urged the Government to introduce the one-off levy on oil and gas giants to help families with the cost of living crisis.

The Labour leader told MPs on 27 April: "North sea oil producers are making so much unexpected profit that they call themselves ‘a cash machine.

“That cash could be used to keep energy bills down."

The Liberal Democrats also supported a windfall tax, with leader Ed Davey saying energy companies should "pay a little more to help the most vulnerable".

Sir Davey demanded a “much tougher windfall tax” to help millions of people contending with higher energy bills.

The SNP and the Green Party also backed such a tax.