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Factbox-What is a windfall tax and when has Britain used it?

Stock Markets May 26, 2022 14:22
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2/2 © Reuters. FILE PHOTO: Britain's Chancellor of the Exchequer Rishi Sunak arrives to speak at the Confederation of British Industry's (CBI) annual dinner in London, Britain, May 18, 2022. Peter Nicholls/REUTERS 2/2

LONDON (Reuters) - Britain announced a 25% windfall tax on oil and gas producers' profits on Thursday to help fund a 15 billion pound ($18.9 billion) package of support for households struggling to meet soaring energy bills.

WHAT IS A WINDFALL TAX?

A windfall tax is a one-off levy imposed on a company or a group of companies by the government, targeting excess and unexpected profits.

Opponents of windfall taxes say they risk discouraging investment, but those in favour argue that by being a one-off they are less damaging to economic activity than other taxes.

WHAT HAS BRITAIN ANNOUNCED?

Finance minister Rishi Sunak said he would introduce a new, temporary "energy profits levy" - a 25% surcharge on the extraordinary profits of oil and gas companies.

A new investment allowance will nearly double investment relief for oil and gas companies, meaning that for every pound a company invests it will get back 91 pence in tax relief.

This new tax takes effect immediately and is expected to raise 5 billion pounds in the next 12 months. It will be phased out when oil and gas prices return to "historically more normal levels".

WHY NOW?

As Britain faces a cost of living crunch with surging energy prices and rising inflation, the opposition Labour Party has argued for a windfall tax on oil and gas companies, including BP (LON:BP) and Shell (LON:RDSa), who have benefited from soaring oil and gas prices.

On Tuesday, Britain's energy industry regulator said energy bills were set to surge by another 40% in October.

HOW HAVE SUCH TAXES BEEN USED IN BRITAIN BEFORE?

BANK WINDFALL TAX, 1981

Conservative prime minister Margaret Thatcher's finance minister Geoffrey Howe imposed a windfall tax on banks that had made excess profits, having been largely protected from the effects of recession. It charged 2.5% of their non-interest bearing current account deposits to raise around 400 million pounds ($504 million).

SUPPLEMENTARY PETROLEUM DUTY, 1981

Howe also introduced a special tax, known as the Supplementary Petroleum Duty, on North Sea oil and gas firms which had benefited from soaring oil prices. It was levied on gross revenues rather than profit, at 20%. It was withdrawn after two years.

PRIVATISED UTILITY FIRM LEVY, 1997

Labour prime minister Tony Blair's government imposed a levy on the excess profits of privatised utility companies which it argued had been undervalued when sold off by the Conservative government.

It charged 23% of the difference between the value at which the companies were floated and their current value based on their profits since. The windfall tax was estimated to have raised 5.2 billion pounds and the money was used to fund a programme to help people off welfare and into work.

WHICH OTHER COUNTRIES HAVE LEVIED THEM?

SPAIN

In September, Spain passed emergency measures to reduce high energy bills by redirecting billions of euros in extraordinary profits from energy companies to consumers via a windfall tax, with the government expecting to channel some 2.6 billion euros from energy firms to households over six months.

ITALY

In May, Italy said a 10% one-off levy on producers and sellers of electricity, natural gas and petrol products would be raised to 25% to help consumers and business cope with surging energy costs.

The levy applies to profit margins that rose by more than 5 million euros between October last year and April this year compared to the same period a year earlier, with the exception of companies whose profit margin rose by less than 10%.

($1 = 0.7935 pounds)

Factbox-What is a windfall tax and when has Britain used it?
 

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