Taxing questions about a windfall levy

Lots of people are talking about a potential windfall tax levied on the energy firms that have profited from the rising oil and gas prices precipitated by Russia’s invasion of Ukraine.

In the UK, a coalition of opposition parties, consumer groups and others argue that it is fair game at a time when the price of heating homes is rising at its fastest pace in living memory. Yet others say such a levy on profits would be a ‘tax on investment’.

The man with the power, chancellor Rishi Sunak, has been occupying the middle ground between signalling he intends to impose the levy and flatly ruling it out. This week he told the House of Commons he is “pragmatic” and that “no option is off the table”.

But that position can’t hold. From here there are, broadly, two outcomes, one more likely than the other.

In scenario one, Sunak faces down opposition – particularly from Labour’s Ed Miliband – to rule out a windfall tax. He says that such a tax would stymie investment in the UK energy sector. He rolls with the punches to stick to his guns as a free market chancellor (at least since the government declared the end of the economic threat of Covid-19).

In the more-likely scenario two, Sunak announces that he’s on the side of hard-pressed consumers facing steep rises in their energy bills. The government has already provided support, he says, but he wants to go further. The proceeds of the tax will help families to make ends meet.

Politically, far more palatable for the chancellor. It feels like only a matter of time.

Yet is there a third way? Here, the bosses of the energy firms in the crosshairs of a windfall tax volunteer sums into a hardship fund, accepting that they have been the beneficiaries of a huge spike in global prices. They recognise the plight of millions of people struggling with their bills.

This proposition was put forward by an industry veteran quoted by Oliver Shah in The Sunday Times last weekend.

It's easy to pre-empt the arguments against such a move. For one thing, boards are beholden not to taxpayers but to shareholders, who would rather see these funds distributed in dividends. And doesn’t such charity set a precedent, with energy firms expected to foot part of the bill during future price spikes?

But there are counters to this too. Many businesses paid back the government’s furlough money as they recovered from Covid-19, not because they had to but because it was seen to be ‘the right thing to do’. And investors are increasingly pressuring businesses to up their game on ESG, with the ‘S’ relating to doing social good. (Some energy firms do already contribute to funds set aside for vulnerable consumers.)

It's not clear how strongly the argument against a windfall tax has resonated with the public, with polls suggesting strong support for a levy. It now looks too late to correct that.