Talking Point  

Windfall tax may not achieve desired aims

Windfall tax may not achieve desired aims
Chancellor Rishi Sunak facing pressure to introduce windfall tax (credit: Peter Nicholls/Reuters)

A windfall tax on oil and gas giants may not achieve its desired objectives, Quilter Cheviot equity research analyst Jamie Maddock has warned.

Rocketing oil and energy prices following the pandemic and exacerbated by the war in Ukraine, have boosted the profits of the likes of BP and Shell.

As a result, the chancellor Rishi Sunak is facing pressure to impose a windfall tax to help reduce household energy bills.

A windfall profits tax is a one-time levy on a company or industry when economic conditions result in large and unexpected profits

Maddock said: “The idea of a windfall tax on oil and gas producers is politically extremely attractive, but in reality, is a complex issue and may not be quite as effective as hoped.

“You have the issue with who to tax. Changing the corporate tax rate would bring many services that have not benefited in the same way as oil and gas production into scope and thus be quite penal on some firms. Instead, the government could look at ways to change it in such a way that the increased tax take only applies at the oil and gas field production level as opposed to targeting the corporate tax rate.

"While a windfall tax could raise much needed taxes to mitigate the impact of the higher fuel and power prices, and help solve a political headache, due to the international nature of these companies it may not raise as much as is hoped. The figure will very unlikely be in the billions hoped for by some."

Affected companies would have less profits to distribute to shareholders, meaning lower dividend payouts.

The last time a windfall tax was used by the government in power was in 1997, when Gordon Brown introduced it for utility companies. Prior to that the Conservative government had imposed a similar levy on Banks in 1981.

Maddock said: “The good news for consumers is that due to oil and gas companies’ products being tied to international benchmarks, it is unlikely they could pass the cost on to the end user. 

“The only exception to this would be domestic fuel, for example petrol and diesel, so we could still see higher pump prices as a result of any windfall tax, but general energy prices should be unaffected.”