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As the government continue to seek ways to support UK households in line with the cost-of-living crisis, it has recently been announced that a 25% windfall tax will immediately come into place for energy companies across the UK.

This planned ‘Energy Profit Levy’ aims to support the government with the rebuilding of the economy following the pandemic, and will help provide households with a support package in preparation for the expected rise to energy bills in October.

What is a windfall tax?

Put simply, a windfall tax is a one-off tax charged by the government to a single company or group of companies, who have made a substantial amount of profit from something  that they did not achieve themselves (Institute for Government).  

In this case, a windfall tax has been introduced for energy firms such as Shell and BP who have experienced an increase in demand for oil and gas over the previous year due to Russia’s invasion of Ukraine, and the rise in oil inflation since the pandemic.

This is highlighted in a recent report from the BBC which outlines Shell’s huge profit of “£7.3bn in the first three months of 2022, nearly triple of its profit it announced for the same period last year.”

Have we had windfall taxes before?

The UK last experienced a windfall tax in 1997, following the privatisation of nationalised industries, including BT, Scottish Power and United Utilities. Devised to fund a government programme that helped people into work; the tax was a huge success and generated a total of over £5.2bn over two years.

Find out more here.

How does this affect me?

For households across the UK, the impacts of the windfall tax are unexpectedly positive. With over £5bn expected to be raised over the next 12 months; the money will be a vital contribution to the £21bn worth of support packages that the government intend to provide UK households.

The package will provide households across the UK with:

  • A £400 energy bill rebate in October, double the amount previously announced and which will no longer need to be repaid
  • A one-off £650 cost of living payment
  • A £150 council tax rebate (distributed last month)

Read more here.

What would the affect be on investment?

Although the implementation of a windfall tax will help to alleviate the effects of the cost-of-living-crisis, there has been multiple concerns raised over the tax and its ability to discourage investment and present long-term effects on jobs in the supply chain.

With a windfall tax reducing the amount of profits that companies have, we could see businesses reduce the amount that they are investing.

This is evident as one of the UK’s major energy companies – BP – recently announced that it would need to review its plans to invest 18bn in the UK, following the confirmation of the windfall tax.

In addition, the windfall tax is argued to create uncertainty in the current tax system for businesses. The Institute for Government have recently suggested that companies may be discouraged from “capital spending, due to concerns that the government could tax away some potential returns. This could in turn slow economic growth – and brings the risk to the government that more internationally established firms take their business elsewhere”.

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