Windfall Tax - what is the reality?
Posted on: October 20th 2022 · read
Following the announcement of Liz Truss’s Energy Price Guarantee on 8 September, a potential increase in the current windfall tax on UK oil and gas producers will not cover the bailout package, despite reports to the contrary.
While it’s easy to assume an increase in the UK’s windfall tax will fund the energy price cap guarantee, particularly on the profits to be made by UK gas producers and electricity generators in the coming months, questions should be asked on what these profits represent and where they come from.
The current windfall tax applies to ring fenced profits from UK continental shelf oil and gas production, and treasury receipts for such profits in 2021 were £1.4bn. At a 40% corporation tax rate this implies taxable profits were circa £3.5bn. The treasury projected generating tax revenues of £5bn from the windfall tax this year which implies a 6-fold increase in UK oil and gas profits from last year. So even an additional 10% rate increase in the windfall tax would only generate circa £2.0bn of additional tax revenues. This is certainly not a “golden bullet” in terms of funding Truss £150bn energy package. Whilst contributory would need to be weighed against the potential further negative impact, an increase would have on UK investment decisions.
Perhaps the suggestion is that the tax base of the windfall tax should be extended beyond oil and gas extraction profits - but how would that work in practice? The major UK energy producers such as BP and Shell derive their profits from both different geographies and different product lines. If in simple terms the government decided to tax UK based multinationals in the UK on their worldwide windfall profits, that would destroy the UK’s capital markets reputation as one of the best fiscal jurisdictions in the world in which to locate and invest.
Creating additional taxes and increasing tax rates are often blunt instruments that do not produce the desired outcomes and unless fully considered, can have significant negative impacts on economic behaviour.
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