The Chancellor of the Exchequer’s threat to impose a windfall tax on gas and oil companies raking in huge profits from the rising cost of energy is understood to have caused a split between the Treasury and the prime minister’s aides.
Pressure is piling on Rishi Sunak to produce a package of support to ease the cost of living for millions of people struggling with higher food and energy bills.
Inflation has rocketed to 9 per cent, a 40-year high.
The opposition Labour party has called for a one-off tax on the profits of oil and gas companies to help households and energy-intensive industries.
The Conservative-led government has in the past ruled out a windfall tax on energy companies, but Mr Sunak has recently said such a levy could not be ruled out if companies are not investing enough in new projects.
“If it doesn't happen soon and at a significant scale then no option is off the table,” he told MPs in the House of Commons this week.
Boris Johnson’s cabinet is split over the idea, with some ministers “intrinsically opposed” to the levy, according to Kit Malthouse, a senior member of the government. However, he stressed that the policy has not been ruled out.
“We are intrinsically opposed to that kind of taxation,” Mr Malthouse, the policing minister, told Times Radio when asked about a possible windfall tax. “We want to see a pattern of investment from that industry that will help us with our medium and long-term energy problems.
“But the chancellor reserves the right to take all steps he thinks necessary and he's in conversation with that industry all the time, I'm sure.
“My predilection as a Conservative generally is to have low and stable and predictable taxes, and that retrospective taxation is to be avoided, but there are Conservative administrations in the past who have felt the need to tax retrospectively and sometimes the circumstances might warrant that.”
The oil and gas industry has argued that unpredictable tax policies could deter investment and hit jobs.
Officials at the Treasury are convinced a windfall tax now looks “politically unavoidable”, The Times quoted a source as saying.
Mr Sunak in April signalled a possible shift in policy by hinting at such a levy, telling parenting website Mumsnet “that’s something I would look at” if energy companies were not reinvesting their profits in the UK.
On Tuesday he reiterated his threat in the House of Commons, but said the government does not believe a windfall tax is a simple answer to the problem.
Mr Sunak is under mounting pressure from business leaders, charities and MPs from across the political spectrum to produce a package of support after inflation hit a 40-year high, with food and energy costs among the main concerns.
He appeared to acknowledge the need for further support for the poorest in a speech on Wednesday night at the Confederation of British Industry’s (CBI) annual dinner. He said “right now, we also have a collective responsibility to help the most vulnerable in our society.”
“And so, as the situation evolves our response will evolve,” he added. “I have always been clear, we stand ready to do more.”
While Mr Sunak wants to be seen to do more to help struggling households, he is also wary of inflicting further damage on public finances, which have taken a serious battering from the Covid-19 pandemic.
The Bank of England has warned Britain’s economy could plunge into a recession before the end of the year. It has also forecast that inflation will rise above 10.25 per cent in the fourth quarter of this year — the highest level since 1982.