Industry experts are warning that the imposition of a windfall tax on energy giants’ huge profits could end up leaving consumers out of pocket.
The Opposition political parties, led by the Labour Party, have led calls for a one-off tax as householders face record-high prices for gas and electricity.
The average household energy bill is set to rise to around £2,000 per year after Ofgem announced that the energy price cap will rise by £694 from April – a move driven by the surging price of gas on the international markets.
Labour propose £1.2bn energy tax raise
Labour has proposed an increase of 10 percentage points on corporation tax for North Sea oil and gas producers, in the year beginning in April 2022, which would raise £1.2bn.
It is also proposing the scrapping of VAT on domestic fuel bills (currently 5%) and increasing the Warm Homes discount from £140 to £400 and extend the benefit to nine million families, up from the 2.2 million that currently receive it.
‘Short-term gain’ could bring ‘long-term pain‘
Shirley Allen, a Partner at law firm Pinsent Masons, said that while a windfall tax might bring a short-term gain to the Treasury, the energy industry – and, ultimately, consumers – could be left to deal with the long-term pain.
She said: “Part of the concern lies in the question of who ends up paying the tax. If the burden falls on shareholders, then millions of ordinary people will foot the bill through pension funds, savings and insurance policies that have investments in the oil and gas industry.
“Alternatively, if the tax forces energy companies to increase prices, then it is their customers who will ultimately pay – the very people that the proposed windfall tax is intended to help.
‘Bonanza’ for Treasury
“The oil and gas sector’s profits are already taxed at a rate of 40% – more than double that of any other sector of the economy – and owing to the rise in the price of gas, HMRC is set to take in an additional £3 billion from providers in the two years since last April.
“As the offshore industry body, OGUK, said earlier this year, a rise in gas or oil prices ‘always means a bonanza for the UK Treasury’.”
Andy Mayer, of the Institute of Economic Affairs, said: “Fossil fuel energy companies have not enjoyed ‘windfall’ profits. They lost billions in 2020, when the pandemic caused prices to plunge. They regained some of this in 2021-22 when economic activity restarted.”
Energy giants BP and Shell have enjoyed record profits as a result of surging energy prices. Analysts estimate both firms could make almost £40 billion in profits this year.