What is the exceptional tax and how does it work? Business

Ministers have previously ruled out a windfall tax, warning it would halt business investment at a time when the country seeks to bolster domestic energy production.

However, Chancellor Rishi Sunak has warned he could always turn to a windfall tax if oil companies fail to increase investment. Shadow Chancellor Rachel Reeves also said the case for a windfall tax on windfall profits to ease the cost of living crisis “cannot be ignored”.

How would that work?

Labor has proposed a 10 percentage point rise in corporation tax for oil and gas companies.

He estimates that a year-long rise in the energy giants’ tax bills would net the Treasury £1.2billion. Even if all that money was earmarked for household energy bill relief, it would be a drop in the ocean compared to the pain families are suffering.

The cost of electricity and gas in 2022/23 is expected to be £38bn more than the previous year, according to Aurora Energy Research.

How does the tax work in other countries?

Even if a raid on energy giants doesn’t bring huge bill relief, other countries have turned to windfall taxes to ease the strain on household budgets.

Last September, when gas prices first soared, the left-wing government of Pedro Sanchez in Spain announced a one-off €3 billion tax on “excess profits” from energy companies to help pay for tax cuts for consumers. Last month he extended the tax hike on businesses benefiting from higher rates would remain in place.

Italy also imposed additional taxes on utility profits. Last month he announced a one-off 10% tax on certain energy companies to fund household aid, as the country is heavily dependent on Russian gas.

What has the UK done before?

It wouldn’t be the first time the UK Treasury has resorted to a one-off raid on companies with inflated profits.

In 1997, then-Chancellor Gordon Brown announced a windfall tax on the “excess profits” of public services following their privatization by previous Conservative governments. It aimed to rectify the “bad deal that customers and taxpayers got from the privatization of public services”.

The £5billion raised was used to fund an in-work welfare scheme known as the ‘New Deal’, which aimed to reduce unemployment.

What the critics say

Opponents of the windfall taxes warn it could hamper investment at a time when the UK is trying to increase spending to shore up the country’s energy supplies.

BP chief executive Bernard Looney said a windfall tax “is not going to spur more investment” and many ministers agree. In March this year, Business Secretary Kwasi Kwarteng warned that the plans would be ‘a tax on jobs, destroy investment and add uncertainty to oil markets’.

Many worry that it could also send the wrong signal to foreign investors if they think windfall profits could be targeted in the future.

Critics also point out that retirees often benefit from the profits of oil giants because pension funds own shares in them.

This article is updated with the latest information.