No common ground on a windfall tax on energy companies

The debate took place before Thursday’s announcement by the government of a repayable £200 discount on bills for homes in England, Wales and Scotland from October, and a further £150 council tax rebate for most households in England. This came on the same day a 54 per cent increase in the energy price cap was announced.

Labour speeches

Labour’s Shadow Secretary of State for Climate Change and ‘Net Zero’, Ed Miliband (photographed below thanks to Parliament UK), opened the debate saying people face tough times against the backdrop of inflation running at nearly six per cent and the national insurance (NICs) rise on top. He said the real problem was that we have not gone far enough or fast enough on the ‘green transition’, so we are subject to the volatility of fossil fuels. For the oil and gas sector, the price spike has been a ‘bonanza’, with companies so flush with cash that billions are being used to inflate the share price in buybacks from shareholders. It is just ‘greenwash’ to say that these companies have somehow moved out of fossil fuels and into renewables, he argued.

A windfall tax would bring in £1.2 billion and there is a consensus that it is right thing to do, Miliband claimed. The companies would keep a significant proportion of the windfall, even under his proposals. It is, he said, an unexpected, unearned windfall, half of which they would keep. He added that the backdrop is the ‘incredibly generous’ tax position in the UK, ‘which meant that BP and Shell actually paid no net tax at all between 2018 and 2020’ – and ‘they are forecast to make near-record profits this year’. He reiterated the need to move to renewables, nuclear and zero-carbon alternatives.

Matt Western intervened to say the UK should follow the Norwegians in 1970s and 1980s who used the wealth generated from the North Sea to create sovereign wealth funds. Miliband went on to outline Labour’s plan, by levying the windfall tax, to reduce VAT to zero, to increase the warm homes discount from £150 to £400, and to extend it from the 2.2 million families who currently receive it to nine million. Additionally they would set aside £600 million to ‘help our businesses out’.

Clive Lewis remarked that over the past two years, the North Sea oil and gas that was exported doubled. It is not our oil and gas, it belongs to the corporations that bring it out of the ground, and they sell it to the highest bidder. It does not increase our energy security, he said.

Nia Griffith said Labour’s plan will not increase taxation on working people and anticipates the increases that people will see in their bills. She said Labour’s proposal would offer additional help to nine million households in the most precarious financial situations, with up to a further £400 of help for each household. Together with the VAT cut, that would leave households with bills that are marginally higher than last year’s, she claimed.

Julie Elliott said windfall taxes were used before and could be used again. Peter Dowd asked what the Government going to do about tax reliefs that benefit oil and gas companies and asked the Minister for the total expenditure forgone in tax reliefs in 2020-21. Nadia Whittome said the proposed tax will lessen the burden on families but in the longer term, we must reduce our reliance on gas. She also wants energy brought into public ownership.

Kerry McCarthy remarked that the UK is one of the most profitable countries in which oil and gas industry operates, because of the favourable tax environment. McCarthy even said measures introduced by his Chancellor have meant that many oil and gas companies have paid ‘negative tax’ in recent years. The main objection to windfall taxes is that they are very destructive to business planning. But Bell Ribeiro-Addy remarked that is not really a fair description of a one-off price rise if it is met by a one-off tax increase. Businesses continue as before, but the windfall is redistributed to consumers rather than shareholders, she said.

Closing the debate, Labour’s Shadow Secretary of State for Business and Industrial Strategy Jonathan Reynolds said using a windfall tax to pay for Labour’s suite of policies is fair, proportionate and necessary. The North Sea will continue to be one of the most profitable and attractive places to extract oil and gas from and it will also continue to provide a substantial amount of our domestic supply. No evidence has been put forward today that a windfall tax on those profits, which were never expected or anticipated, would reduce investment or have a negative impact on jobs. He worries about the impact of the energy price rise on the hoped-for growth in consumer spending. High inflation is currently being written into contracts as businesses try to protect themselves against future price rises and the windfall tax would give us a contingency fund of £600 million to help energy-intensive businesses through the energy crisis. The idea that cutting VAT does not help those most in need ‘simply does not hold water’.

Conservative speeches

Opening the debate for the government, business minister Lee Rowley said across Europe there is an increase in the wholesale price of gas caused by growing demand and broader ‘geopolitical issues’ and this demonstrates the importance of long-term security of supply and energy resilience. He pointed to government action on the warm home discount scheme, the winter fuel payment, the cold weather payment and DWP’s new £500 million household support fund. He said that the Labour Party now appears in favour of encouraging as much activity on the UK continental shelf as possible so it can tax it.

Rowley said the implications of a windfall tax would have to fall somewhere: on consumers, on investors or on the activity itself. If on investors, Miliband can expect less of a return for pension funds. He closed his speech by saying: “The Labour Party’s position is to immediately and artificially retard the amount of oil and gas that we produce domestically through penalty taxation, not necessarily because a windfall is needed, for aims that should or should not be laudable, but because reducing production is the ultimate objective.”

John Redwood took the opportunity to ask the government to cancel the NICs increase, claiming the public finances generated a big surge in revenue compared with the Budget forecast last March, and our deficit is around £60 billion lower than they thought it was going to be. Redwood said there is a very good ‘green’ case for substituting domestic gas for imported LNG, not least that doing so would generate less C0₂ and UK would collect much more tax on it. He shares SNP’s concern (see below) that a windfall tax could collapse investment and reduce the amount of extraction and future investment.

David Duguid said Miliband’s VAT cut would disproportionately benefit wealthier people with larger houses and higher fuel costs. Duguid said the current offshore oil and gas tax system is one of the ‘most competitive and progressive’ regimes globally; through it, the sector will pay an additional amount of at least £3 billion over two tax years. That is due to the automatic mechanisms that are part of the specially designed tax regime by which the oil and gas sector already pays a total of 40 per cent, made up of 30 per cent in corporation tax and an additional supplementary charge of 10 per cent. The MP went on to say the current tax regime was developed because of lessons learned from three previous significant increases in UK continental shelf (UKCS) corporation tax. After each increase, a range of incentives was needed to win back investment into the UKCS that had been lost because of the increase. Windfall taxes such as the one proposed by Labour have been tried before; although they were intended to increase returns to the Treasury, tax revenues actually fell, he claimed. A one-off windfall tax on oil and gas companies would significantly undermine the sector’s ability to sustain its investment in the oil and gas industry, make us more dependent on foreign imports of hydrocarbons and put security of supply, as well as thousands of jobs, at risk.

On Stephen Flynn’s comment about Norway (see below), Peter Aldous said it has far bigger resources than UK, and much smaller population and country, as well as a stable fiscal taxation regime, which has enabled it to be at the forefront of the drive towards a low-carbon economy.

Andrew Bowie worries that international companies would be put off the UK if the tax regime can change ‘at the stroke of a pen’. Sir Robert Syms said the North Sea needs a stable tax regime so that so that less viable fields are eked out to their maximum life and so that newer fields in deeper waters are developed: “Why kick a successful industry when it can generate a lot more wealth, a lot more jobs and a lot more gas and fuel… just to make a few runs?”

The Minister for Energy, Clean Growth and Climate Change, Greg Hands, said the government already places additional taxes on the extraction of oil and gas, with companies producing oil and gas from the UK continental shelf subject to headline tax rates on their profits that are currently more than double those paid by other businesses.

Other speeches

SNP business and energy spokesperson Stephen Flynn said the ‘deplorable’ decision to take £20 away from those on universal credit could be reversed to help with this energy cost crisis and the UK government could match the Scottish government by introducing a £20 child payment to assist those in the most difficult situations. Flynn does not support the Labour windfall tax policy because of concerns about the potential impact on investment and subsequent impact on workers. He added: “If we look across the North Sea at Norway, £1 trillion is sitting in a bank account because the Norwegians invested in their future. With that money, they are able to shield their public from the shocks that all our constituents face at this moment in time.”

Lib Dem business spokesperson Sarah Olney supports a one-off targeted windfall tax to deal with the medium-term gas price rise. The Lib Dems propose not only to double the warm home discount payments from £150 to £300 but to extend it to all those on universal credit and pension credit, and to double the winter fuel allowance to give up to £600 a year to 11.3 million elderly pensioners to help them with their heating bills. Olney also said the NICs rise is the ‘wrong tax rise at the wrong time’.

Lib Dem Wera Hobhouse made a wider complaint that the market seems regulated for the benefit of the gas companies. In April many people who have switched to a renewable electricity supplier will find they are paying more for their electricity, even though they are not buying any electricity generated from gas.

Alan Brown (SNP) said the windfall tax does not address the immediate practicalities of the cost-of-living crisis. This is because either it will be a retrospective tax to try to claw money back once profits are announced at the end of the financial year, or it will not kick in for a year’s time. He added: “The harsh reality is that every previous windfall tax [on Scotland’s oil and gas] has led to a drop in investment.” Although he is ‘uneasy’ when hearing about companies such as Shell not having paid corporation tax for a couple of years, or BP talking about its company being a cash machine.

Richard Thomson said a windfall tax will do nothing to help us reduce energy bills, for which we need to drive energy efficiency and reduce our CO2 emissions. But he did speak about the need for a a progressive tax and benefits system to ‘embed social justice’.

The Opposition Day motion (which “calls on the government to introduce a windfall tax on the profits of North Sea oil and gas producers; and further calls on the government to use that windfall tax to help fund a package of support for families and businesses facing the energy price crisis”) was passed 192:0. However it has no binding effect.

By Hamant Verma, CIOT Senior External Relations Officer