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

How will this work?

Mr Sunak is introducing a temporary 25% “energy profit tax” to reflect the “extraordinary profits” made by oil and gas companies.

They now face a headline tax rate of 65%, which is a combination of corporation tax – currently at 19% – existing additional levies and windfall profits tax. This figure is much higher than that of companies in other sectors which currently pay the 19% corporation tax. Some sectors have additional charges, such as an 8pc bank surcharge.

The new tax will only affect profits made after May 26, 2022 and will be “phased out when oil and gas prices return to historically more normal prices”.

Official documents accompanying the announcement indicate that it could last until 2026, with a clause removing the tax on December 31, 2025.

It is expected to bring in around £5billion in its first year, according to the Treasury, and will be calculated in a ‘similar manner’ to existing corporation taxes. It will not apply to the electricity generation sector.

The levy also includes an investment allowance, which will try to incentivize these energy companies to spend money by offering 91p in tax relief for every pound invested.

In theory, oil and gas companies that significantly increase their investments would result in significant relief, which could partially offset the boost to treasury coffers from the windfall tax.

How does the tax work in other countries?

It is not unprecedented. Other countries have already turned to windfall taxes to ease the pressure on household budgets.

Last September, when gas prices first soared, the left-wing government of Pedro Sanchez in Spain announced a one-off €3bn (£2.6bn) tax on ‘excess profits’ » energy companies to help pay for tax cuts for consumers.

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

What has the UK done before?

It is also not the first time that the British Treasury has launched a 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.

Meanwhile, in 1981, Margaret Thatcher imposed a windfall 2.5% tax on banks as interest rates soared. It raised £400m, or around £3bn in today’s money.

What are the critics saying?

Opponents of 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 in the wake of Putin’s war.

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

Earlier this month, the business secretary added that the tax ‘doesn’t make sense’ if Britain is to encourage investment in the North Sea and have domestic energy supplies.

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.