How will it work?
Mr. Sunak is introducing a temporary 25 percent “energy profit tax” to reflect the “extraordinary gains” made by oil and gas companies.
They now face a general tax rate of 65%, which is a combination of the current corporate tax rate of 19%, the existing additional taxes and the extraordinary income tax. This is much higher than companies in other sectors that currently pay 19% corporate tax. Some sectors have additional charges, such as an 8pc bank surcharge.
The new tax will only affect profits earned after May 26, 2022 and “will be phased out when oil and gas prices return to historically normal prices.”
The official documents accompanying the announcement say it could last until 2026, with a clause eliminating the tax on December 31, 2025.
They are expected to raise about £ 5bn in the first year, according to the Treasury, and will be calculated in a “similar way” to taxes on existing corporations. It will not apply to the electricity generation sector.
The tax also includes an investment bonus, which will try to encourage energy companies to spend money by offering 91 p. of tax relief for every £ 1 they invest.
In theory, significantly increasing investment by oil and gas companies would result in large amounts of relief, which could partially offset the momentum in the coffers of the Treasury due to the extraordinary tax.
How does the tax in other countries work?
This is not without precedent. Other countries have previously resorted to extraordinary taxes to ease the pressure on family budgets.
Last September, when gas prices rose for the first time, the left-wing government of Pedro Sánchez in Spain announced an extraordinary tax of 3 billion euros (2.6 billion pounds) on the “surplus profits” of energy companies to help pay consumer tax cuts.
Italy has also imposed additional taxes on public service profits. Last month he announced an extraordinary 10% tax on some energy companies to finance household aid with the country heavily dependent on Russian gas.
What has the UK done before?
Nor is it the first time the UK Treasury has made a foray into companies with alleged profits.
In 1997, then-Chancellor Gordon Brown announced an extraordinary tax on the “excess profits” of public services following their privatization by previous Conservative governments. It sought to rectify the “mistreatment of customers and taxpayers with the privatization of public services.”
The £ 5 billion raised was used to fund a work welfare plan known as the “New Deal”, which aimed to reduce unemployment.
Meanwhile, in 1981, Margaret Thatcher imposed a 2.5% extraordinary tax on banks as interest rates rose. He raised £ 400 million, about £ 3 billion in cash today.
What do critics say?
Opponents of unexpected taxes warn that it could hamper investment at a time when the UK is trying to increase spending to boost the country’s energy supply in the wake of Putin’s war.
BP CEO Bernard Looney said a special tax will not “encourage more investment” and many ministers agree. In March this year, Kwasi Kwarteng warned that the plans would be “a tax on employment, destroy investment and increase uncertainty in oil markets.”
Earlier this month, the business secretary added that the tax “makes no sense” if the UK wants to encourage investment in the North Sea and have national energy sources available.
Many fear that it could also send a bad signal to foreign investors if they believe that excessive profits could be targeted in the future.
Critics also point out that pensioners often benefit from the benefits of oil giants, as pension funds have shares in them.
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