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Could Rishi Sunak hit oil and gas companies with a windfall tax after all?

Ministers had previously vetoed the idea of a windfall tax for dealing with the cost of living crisis, but Labour are now calling for a vote on the measure.

The Labour Party has once again called on the government to levy a windfall tax on oil and gas companies to help ease the spiralling cost of living crisis.

The opposition is backing a parliamentary vote on the introduction of a windfall tax following weeks of indecision from inside government on the policy. 

Shadow climate change and net zero minister Ed Miliband told the BBC it was “obscene” the tax hadn’t been introduced yet, while Labour’s shadow chancellor, Rachel Reeves, accused the cabinet of being in “complete chaos” over windfall taxes. 

The Labour Party joins a chorus of industry voices and campaigners who have been urging the government to tax oil and gas companies on their record profits to help ordinary people pay everyday costs. 

But what actually is a windfall tax, and how likely is it that the UK will introduce one? Here’s everything you need to know.  

What is a windfall tax? 

A “windfall tax” is any tax levied on an unexpectedly large profit which is usually regarded as unearned because circumstances outside of the company’s control created it.

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In recent months, the soaring cost of wholesale oil and gas globally has led to surging profits for oil and gas companies, who have benefitted from the rising prices. 

Shell made £4.7bn in profit in the final quarter of 2021 alone, with annual profits exceeding £14.2bn – up from £3.57bn the year before. 

In spite of these large profits, the oil company paid no tax on its operations in the north sea in 2021 for the fourth year in a row thanks to tax refunds paid by the UK Treasury for the decommissioning of old oil platforms. 

These exceptionally high profits have led the Labour Party and a number of campaigners to call for a windfall tax to help ease the cost of living for ordinary people, whose energy bills have risen dramatically since the price cap was removed at the start of April.

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What has the government said about levying a windfall tax?

Government ministers have contradicted each other, and even themselves, over the idea of introducing a windfall tax. 

Reports in early May suggested that Chancellor Rishi Sunak had asked the Treasury to explore the option, after indicating on a Mumsnet Q&A that a windfall tax could be on the cards without more investment from oil and gas companies. 

Previously, Sunak had said that a windfall tax would deter investment in the UK. 

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A number of other ministers have spurned the idea of a windfall tax, with education minister Nadhim Zahawi saying in January that “a windfall tax on oil and gas companies that are already struggling in the North Sea is never going to cut it.”

During Prime Minister’s Questions in early March, Boris Johnson insisted that a windfall tax would only lead energy prices to rise further for ordinary people. 

“The net result of that would simply be to see the oil companies put their prices up yet higher,” he said. 

Earlier in the year, Sunak accused Labour of “political opportunism” after calling for a windfall tax, saying that the idea seems “superficially appealing” but would ultimately deter investment in the UK.

It remains unclear whether or not the tax will be levied, though if Labour’s demands are met, there will be a vote on the policy this week. 

Reports in The Telegraph suggest that Conservative MPs will be told to vote down a windfall tax if the measure is put before parliament. 

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Why do we need investment in ‘energy security’?

The UK and a number of other western countries have been scrambling to reduce their reliance on imports of Russian oil and gas in order to avoid inadvertently funding Putin’s war in Ukraine.

As such, ministers like Sunak have been looking for ways to boost production of energy in the UK to avoid reliance on foreign imports. 

Energy produced domestically – particularly renewable energy – is also cheaper, meaning extra production will drive down energy bills for ordinary people.

The chancellor said on Mumsnet that he was looking for large energy firms to invest more in UK energy security.

“Nothing is ever off the table in these things. Right now, what I believe is the right thing to do is to encourage these companies to invest so that we have more energy security and support the economy,” he said. 

The Telegraph has cited “Treasury sources” as saying the chancellor’s comments are intended as a “warning shot” to oil and gas companies to begin investing in the UK soon. 

Have other countries used windfall taxes?

Countries in Europe, including Bulgaria, Italy, Romania and Spain have imposed windfall taxes on power generators in recent months.

The revenue raised from these taxes has gone towards financing measures to assist citizens with the cost of living. 

Britain has also used windfall taxes before – most notoriously in 1997 with chancellor Gordon Brown’s budget.

Brown levied windfall taxes on companies which had been privatised by previous Conservative governments including power utilities, water companies and telephone company BT. 

Labour’s argument for the taxes was that these companies had been undervalued when they were privatised. 

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