Sunak explains thinking behind windfall tax

10 Jun 2022

Chancellor Rishi Sunak has warned MPs and the public that the Government cannot fully insulate people from the cost-of-living crisis, and said that he is urgently looking at extending the energy profits levy to the electricity generation sector.

The Chancellor’s comments came during a session with the House of Commons Treasury Committee on Monday 6 June, in which he also explained the reasons behind his earlier reluctance to hit energy companies with a windfall tax, and why he had not provided any further support for businesses in his new measures.

The energy profits levy

Chair Mel Stride, a Conservative, opened the meeting by saying the Chancellor’s recent statement on 26 May 2022 on action to counter the rising cost of living, which included a windfall tax (the energy profits levy) on energy companies, was a ‘well placed intervention’ that will ‘help millions of people.

Julie Marson, Conservative, asked why the Chancellor said a week ahead of announcing the energy profits levy that he does not believe in windfall taxes. Sunak defended the change-of-heart saying ‘he is pragmatic about their use’.

“If you have a situation, as we have here, where there are companies that are making extraordinary profits - in large part as a result of a war - it is reasonable to think that we should tax those profits fairly,” said the Chancellor. “It is a reasonable approach, but you want to be thoughtful about it. I have consistently said that in my mind it is about investment and making sure that you try to tax profits fairly, but in a way that continues to support investment, because investment is good for jobs, the economy and, in this instance, energy security. We took the time to design a levy that is not as blunt an instrument as what others suggested and that contains a very generous incentive to invest included within it.”

Marson opined that, during covid, there were times when the sector was making what you might call extraordinary losses. We do not subsidise a sector in those circumstances, so is it right that we should tax profits? Sunak replied that it is not completely right to say that we have not made changes in the other direction when prices have gone lower.

Separately Sunak said Marson is correct that companies cannot offset their losses from this windfall tax because he wants to ‘tax genuinely excess profit’.

On why the measures were not announced sooner, Sunak claimed he had waited until he had a clearer sense of what would happen to energy bills in the autumn, ‘which we have now that we are about two thirds of the way through the price cap observation window’. He said had he done something months ago, as some were saying, it probably would not have been sized appropriately and he would not have been able to make sure he provided the reassurance that he was able to give. The spring statement forecasts all close at the beginning of March, at which point the observation window for the autumn price cap had barely opened, he explained.

The investment allowance of the levy

Sunak explained to Gareth Davies, Conservative, that the relief applies ‘immediately at the moment of investment’. That is different from how the investment relief that currently exists within that regime operates, where it does not apply until that project starts generating revenue, which is often not for an average of five years.

Sunak said: “We have made this change to make it very supportive of investment. It is not just the rate that is more generous, but, because it applies immediately, on an NPV [net present value] basis, it will be considerably more generous than what currently exists. It adds to the idea that we generally want to try to bring forward that investment.”

Dan York-Smith, The Treasury’s director of strategy, planning and budget, said this will be a net positive impact on investment and therefore there will be more investment than before, but the precise amount of that is subject to OBR scrutiny.

‘Super-deduction’

Gareth Davies
remarked that there is some criticism that the super deduction has not resulted in as much investment as was perhaps hoped or expected, or even planned for. What makes you think that this investment incentive within the new windfall tax will be more impactful or more successful than that super-deduction? he asked.

Sunak replied that the Government are still collecting data and talking to industry about the impact of the super-deduction. “I think the big difference is that you obviously had omicron towards the middle of it and we were not completely done with coronavirus, so that was a big extra added bit of uncertainty that got put in the mix. It will be very hard to disaggregate the impact of that, but it probably had some impact and hopefully that is not the situation here.”

“The way these companies are making investment decisions is probably slightly different—it is quite specific,” continued the Chancellor. “And now that we have published an energy security strategy in which natural gas in particular has a very clear role in the medium term to support our transition, and other policies that are supportive of that - for example, licensing decisions  are being made at a faster pace - I am confident that there is a strong signal from government to industry that we want to see that investment and there is also a medium-term policy framework that is supportive of it, not just the short-term tax relief.”

Extension of windfall tax

Sunak explained that he is urgently looking at extending the energy profits levy to the electricity generation sector and ‘their extraordinary profits’. He told Alison Thewliss (SNP) that ‘‘urgently’ is not months and months’. Many other countries in Europe are addressing this, after all.

Sunak also suggested that this extension will contribute to the £15 billion cost of his cost-of-living measures. “We have a longer-term plan to reform the market, but we need to make sure that we have the right policy in place in the shorter term”, he added.

VAT

Treasury official Dan York-Smith said the reduction in VAT on energy-saving materials applies to loft and cavity wall insulation. They are less expensive to buy and fit than, for example, a heat pump, but it does make a difference.

Support for business

Kevin Hollinrake
, Conservative, asked the Chancellor why he chose not to provide any support for businesses in his new measures.

Rishi Sunak said a reason is that the inflation that we are seeing is the result of prices being passed through the chain to consumers, and the Government has already provided different types of support for business, including, notably, business rates holidays coming into this year. The Chancellor said the Government is engaging with energy-intensive companies on improvements to existing schemes.

In wider comments, Sunak said he has not seen ‘anything alarming’ in insolvencies and business profitability, and business deposits are worth about £100 billion.

Hollinrake was unhappy that the UK is an outlier among European countries by not cutting business energy taxes, or providing subsidies and grants.

Sunak countered that the support the Government has provided with the cost of living is about £37 billion over the various things it has done, which is comparable to other big G7 countries. Sunak added that none of those countries has anything like the annual investment allowance. He claimed that about 40 per cent of the benefit of the fuel duty freeze and cut goes to businesses. He added though, that he is looking at how HMT might better incentivise business capital investment through the tax system.

Council tax rebate

Siobhain McDonagh
, Labour, asked whether, at a time when the total tax burden has risen to the highest level since the 1940s, it is really good use of taxpayers’ money for somebody on The Sunday Times rich list - or indeed for any MP or Minister - to be receiving second-home support when others are choosing between eating and heating?

The Chancellor replied that the Labour party policy was a VAT cut, ‘which would have done the same thing’.

McDonagh came back at him to ask if there was any reason why you could not tackle people receiving multiple rebates through the self-assessment tax return, like you do with child benefit? Or perhaps you could have used local authorities, who are completely aware of who owns second homes?

Sunak said he wanted to ensure that the help got to people in as effective and efficient a manner as possible, and that is why the Government have chosen to do it through energy bills. He added that the council tax system is only a rough proxy for household income, it is not a perfect proxy.

Further support?

Dame Angela Eagle
, Labour, asked the Chancellor, if the Ofgem price cap turns out to be higher than its initial estimate, whether he would provide further support. Sunak said the Government are always responsive but it is not possible for the Government to ‘fully insulate people from increases in the cost of living and inflation, so it is not as if it is something that we can precisely try to eliminate’.

Eagle wondered how Sunak could claim, when he had introduced a package like this, which now is unlikely to remain financed by borrowing rather than tax rises, that he is fiscally Conservative. She suggested Sunak was ‘really only raising, in the windfall tax, the subsidies you have already given to people to carry on operating in the North Sea, aren’t you?’ Sunak replied that ‘I don’t look at it like that’.

Economic impact

The Chancellor said his measures were ‘temporary, timely and targeted’ to minimise the risks of inflation bedding in, and mean he can still take debt and borrowing to a ‘sustainable place’ in the ‘medium term’.

Mel Stride suggested that, if the Chancellor is transferring money to individuals, surely that is an instant stimulus to the economy? Sunak countered that the money is going to those people who are going to spend it on things that are ‘absolutely necessary’ for them to have a standard of living that ‘we think will be appropriate’. Sunak was insistent that the impact on inflation is ‘minimal’.

Stride asked Sunak if Sterling is something that is a concern to him. Sunak replied that he has confidence in the medium-term outlook for the economy.

Rushanara Ali (Labour) was concerned that announcing large fiscal measures outside the Budget or spring statement means they are announced without MPs seeing the impact on the wider economy and without independent costings analysis from the OBR. Sunak defended this, saying ‘the circumstances are reasonably exceptional’ and adding that OBR forecasting ‘doesn’t lend itself to more rapid policy and decision making’.

Poverty and pensioner support

Anthony Browne
(Conservative) cited concerns from the Resolution Foundation think-tank that multiple-children households have bigger costs but do not get more help from the Government’s measures. He asked the Chancellor if his package is sufficient to prevent an increase in child and pensioner poverty.

Rishi Sunak replied that three quarters of the money he announced goes to those vulnerable households and pensioners. But he admitted the Treasury has not measured the distributional impact on child poverty of the recently announced support package.

Sunak accepted there are cliff edges to his package of support but said that that is inevitable with a targeted measure.

Emma Hardy, Labour, was worried that DWP data for year end 2020 shows that pension credit has a take-up rate of only 73 per cent, ‘so we know there are lots of people who are entitled to pension credit who are not currently receiving it’. Sunak said the DWP are in the midst of a project to increase the take-up of pension credit. He noted the additional £300 cost of living payment for pensioners that will be delivered in the autumn, alongside the winter fuel payment. “That means that a typical pensioner household will receive about £850 of support this year,” he told the committee.

Other issues

Emma Hardy
asked if encouraging remote working reduce regional disparities and reinvigorate left-behind areas? Sunak said it depends on the circumstances to the business and the employees in question. I don’t think you can have a blanket response to that, he said.

Northern Ireland Protocol Rishi Sunak said: “The intention is to have a dialogue with our partners, which we are continuing to do, to make sure we can try to reach a sensible settlement to some of the challenges that we are seeing about Northern Ireland’s place in the UK economically. There are very clear challenges and the protocol is proving to be a barrier to a resumption of a functioning Executive in Northern Ireland. It is right that we try to take steps to address that.”

The full session is here.

By Hamant Verma, CIOT Senior External Relations Officer