UK Chancellor Rishi Sunak confirmed today that he plans to introduce a tax on oil and gas companies to help ease the cost of living crisis.
Sunak announced a raft of support packages totalling £15bn, including a new £400 grant to households for energy bills that will replace the energy bill discount.
The cost-of-living support package will be funded by a so-called ‘windfall tax’ on oil and gas companies designed to provide financial support to those struggling with rising costs.
He said he was taking an activist approach to supply-side reforms.
The idea for the windfall tax was originally put forward by Liberal Democrat leader Ed Davey and rejected by the Conservative government, which has since reneged on its stance.
Sunak said he will bring in a new temporary levy to tax energy firms, which will represent a 25% tax on oil and gas profits.
He plans to build a new investment allowance into the levy, similar to the super deduction, which aims to incentivise companies to reinvest profits.
Sunak said the oil and gas sector is making extraordinary profits due to rising commodity prices following Russia’s war on Ukraine.
He expressed sympathy with oil and gas companies and the need to tax these profits fairly.
The Bank of England forecasts inflation will grow to 9% this year, primarily as a result of Covid-19 and the war on Ukraine.
Sunak said he was confident the government can get inflation “under control” with a responsible fiscal policy that is timely, temporary and targeted.
He plans to increase the amount of funding available for housing support this October and provide disabled people with £150 to help with living costs.
He also announced a package worth £5 billion in support for households, which involves providing one-off payments of £650 to low-income households and payments of £300 to pensioners.
As the public clamour for someone, somewhere to do something grows, it is therefore not surprising that the Government’s latest policy U-turn should focus on a windfall tax.
Rain Newton-Smith, chief economist at the Confederation of British Industry, said: “Helping people facing real hardship amid one of the worst cost-of-living crunches in recent memory is the right thing to do.
“Despite the investment incentive, the open-ended nature of the energy profits levy—and the potential to bring electricity generation into scope—will be damaging to investment needed for energy security and net zero ambitions.
“It sends the wrong signal to the whole sector at the wrong time against a backdrop of rising business taxation elsewhere."
Chris Sanger, Ernst & Young’s head of tax policy, said: “The Chancellor has sought to blend two approaches of the past: first, this is a prospective tax, looking at profits from today, following the approach adopted when George Osborne most recently increased the burden on oil and gas production. And secondly, he is using the mechanism of his own super-deduction, to give an added incentive for investment during this period of high taxation.
“This leaves profits earned before today outside the scope of the tax increase, allowing the Chancellor to argue that this new levy is not retrospective."
Russ Mould, investment director at AJ Bell, said: “A windfall tax and targeted support for those that need it the most looks like good politics and it may provide economic relief too, in the near term.
“However, this short-term solution must be complemented by long-term planning and the Chancellor has gone some way to addressing that with the new Investment Allowance which is designed to incentivise oil and gas firms to invest by saving them 91p via tax relief for every £1 they invest.
“Moreover, the UK’s energy policy appears confused. In the run-up to COP26, the Government was understandably beating the renewables drum and it even blocked the development of a gas field in the North Sea by Shell.
"In its wake, it has cut air travel duty for domestic flights, cut fuel taxes to effectively subsidise car travel and now used the windfall tax to fund further fuel consumption.
"If it does not help stimulate supply, then demand will rise and the current problem of lofty prices may only be perpetuated, so a clear, long-term policy on how best to manage the gradual transition from hydrocarbons to renewables is required. Political grandstanding and would-be acts of escapology are of little use in this respect."
Kallum Pickering, Senior Economist at Berenberg Bank, said: "Do nothing can be a good option: A cost of living shock now might be a price the UK has to pay unless it wants to run the risk of worsening the inflation problem and suffering a period of high interest rates and elevated unemployment.
"The recent Russia and China shocks have amplified high inflation that was initially caused by the massive distortions to the global economy from COVID-19 lockdowns. The best option for UK fiscal policymakers would be to stay on the side-line and let the market economy work out the distortions.
"While it may be politically hard to accept that energy companies are running high profits as the least-well off are squeezed by high energy prices – this is what happens during an energy supply shortage. But high profits now support investment in future energy supplies and signal to potential entrants to enter the market and compete for a share of those high profits by adding to supply."
Shares in Shell rose 1% to 2,401p.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: ‘’As Chancellor Rishi Sunak perfected his U-turn on a windfall tax, the share prices of BP and Shell also looped lower, before climbing back up, as investors shrugged off its impact given that it is expected to be a short lived hit.
"It may mean dividends are pushed lower temporarily, but given that tax will reduce if companies invest more, it’s likely to mean an acceleration of investment by BP and Shell, a strategy which will be welcomed by many investors who see environmental progress and not just shareholder pay-outs as crucial for their long term growth prospects.
"A chunk of profit may still be scooped from the oil and gas majors but the levy will still represent just the cream on the top of fat volumes of cash being generated by energy giants due to the higher price of oil. A barrel of Brent crude, the international benchmark, has edged higher to just shy of $115 dollars. It is up by around 50% since the start of the year pushed higher by the outbreak of war in Ukraine."
Michael Hewson, chief market analyst at CMC Markets UK, said: "Today’s announcement hasn’t had a noticeable effect on the share prices of BP, Shell, or Harbour Energy (LSE:HBR), apart from a modest dip in the aftermath of the announcement.
"The new tax will take effect immediately with a sunset clause of December 2025.
"The Chancellor appears to have decided not to include the electricity generating sector in today’s announcement, however in today’s statement the door has been left open to them being included later in the year, when new measures to alleviate the impact of higher energy prices are likely to be needed, as we look towards 2023. Consequently, SSE and Centrica shares have slipped back lower, reversing their gains from yesterday."
Garry White, chief investment commentator at Charles Stanley (LSE:CAY), said: “The Chancellor’s response to the cost of living crisis excluded renewable-energy providers.
"When the idea of including green energy in a windfall tax on 'excess' profits was mooted earlier in the week, it resulted in the share price of companies such as Centrica and SSE, as well as sector-related investment trusts, moving sharply lower.
"That’s because such a tax grab is likely to imply that renewable providers will subject to further, similar moves in the future. This impacts the attractiveness of potential long-term returns in the sector, reducing the likelihood that net-zero targets will be met. A 'temporary, targeted windfall tax levy' of 25% will be placed on oil company profits. However, the carrot for oil groups is an allowance for their investment in clean-energy projects."
Myron Jobson, Senior Personal Finance Analyst at Interactive Investor, said: “Misinformation about the exposure to energy companies in pension funds is perhaps one of the reasons why the majority of respondents to our survey believe the windfall tax would have an adverse effect on their pension. While applying a windfall tax could impact the share price performance and dividends paid out by impacted energy companies, it is a myth that such firms make up a significant portion of most pension funds today.”
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