What is a Windfall Tax?

27 May 2022|Related :

Due to the cost of living crisis in the UK, you may have heard of calls for a windfall tax to be implemented for large energy companies.

You may be wondering, what a windfall tax actually is, and how this may help ease the cost of living for the public across the country. 

Windfall Taxes Explained

So what exactly is a windfall tax? To put it simply, a windfall tax is a one-off tax which can be imposed by the government on a specific company, or group of companies within a certain industry.

The definition of the term ‘windfall’ is as follows:
“A large amount of money that is won or received unexpectedly.”

The purpose of the tax is to target companies that have been lucky enough to profit from something they were not entirely responsible for – in other words, a windfall.

As the BBC says,

“An example of such a windfall would be high energy prices. Companies that get oil and gas out of the ground are getting much more money for it than they were last year, partly because demand has increased as the world emerges from the pandemic and partly because of supply concerns due to Russia’s invasion of Ukraine.”

Energy Companies Profit Levels

So what level of profit does a company need to reach to be potentially subject to a windfall tax? 

BP’s underlying profit, for example, has more than doubled in the first three months of 2022, with the figure reaching just shy of £5 Billion. Shell on the other hand have registered even greater profits so far in 2022. Shell’s £7.3 Billion is their biggest ever quarterly profit – however the firm have said that making the decision to pull out of Russian gas and oil has cost approximately £3 Billion. 

Having said this, the argument is that these companies are making such huge profits, and contributing to the increased cost of living for the general public, due to unnecessarily hiking prices.

How Would a Windfall Tax Help The General Public?

A windfall tax would possibly lead to reimbursements/rebates to the public, using the money gathered from this rebater tax. The government has announced a £150 ‘rebate’ for households across the country, to help with the energy crisis.

However this has not solved any of the issues, as this money eventually has to be paid back. If a windfall tax was imposed, and potentially raised billions of pounds, the government could then, in-theory, use this war-chest to help with subsidising bills for the most vulnerable across the country. 

Windfall Tax Announced

Just as we were about to publish this article the government announced a windfall tax. Chancellor Rishi Sunak has imposed an additional 25% tax on UK energy firms, who will now pay an additional 25% tax for the next 12 months.

How Does This Windfall Tax Work?

A key aspect of this new tax is that any money that these companies may have lost historically, or money they are spending/losing on the withdrawal of business from Russia cannot be used to reduce the amount of tax they pay.

As more details emerge about the newly announced windfall tax, we will update this article. 

£400 Autumn Energy Discount

As aforementioned, the government had previously announced a ‘£150 Rebate’, which eventually had to be paid back. This has now been scrapped.

Due to the windfall tax which has been imposed on large energy firms, the government has now removed the proposed ‘rebate’, and will be applying a non-repayable £400 discount to every household’s energy bill this autumn. 

If you need any help or advice when it comes to tax, give our friendly team a call today. 

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