Rishi Sunak will use windfall tax to fund UK energy crisis rescue package

British Chancellor will announce range of measures to help households deal with rising energy bills

The UK Chancellor of the Exchequer, Rishi Sunak. PA
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UK Chancellor Rishi Sunak will on Thursday unveil a significant rescue package to ease the cost-of-living crisis, partly funded by a windfall tax on energy companies.

Mr Sunak’s plans could be worth more than £10 billion ($12.59bn) and will be mainly focused on the poorest households and pensioners, while raising up to £7bn from a tax on the super profits of energy providers.

Steve Barclay, the Downing St chief of staff, said the new taxation could be put in place without deterring investment. Speaking on Thursday he said the government decided to act after the regulator, Ofgem, lifted the price cap on household fuel bills for later in the year. “What we’ve always said is, in terms of the fiscal response, we wanted to see from the Ofgem guidance what the full impact would be in the autumn on families so that we can get the design of that package right," he said.“We’ve had that guidance this week from Ofgem. That is why the Chancellor is coming forward today.”

Although many Conservative MPs will be delighted that Mr Sunak is acting to ease the cost of living, some on the right are furious that he is planning a windfall tax to raising several billion pounds to help fund it.

North Sea oil and gas company executives said they were resigned to the tax on profits, which Mr Sunak had previously rejected, saying it would hit investment.

They believe a tax on electricity profits could still be on the table for the autumn, when households turn their heating back on.

Offshore Energies UK, which represents the offshore oil and gas industry, has warned a one-off tax on North Sea companies would lead to higher prices and do long-term damage to the industry.

"This is an industry that thinks and plans long-term, so sudden new costs like this proposed tax will disrupt planning and investment and, above all, undermine investor confidence,” said Deirdre Michie, chief executive of the OEUK.

Profits of energy companies have been boosted by the surge in oil and gas prices after Russia’s invasion of Ukraine.

Critics say energy companies are benefiting from a surge beyond their control and a year-long, one-off levy on their profits could help to support troubles households.

But Ms Michie said it was already the country’s most highly taxed industry, paying 40 per cent on their offshore profits, and operators would send the Treasury £7.8bn this financial year.

This, she said, was equal to £279 a household.

Ms Michie said the industry was “actually very proud to pay our taxes” but warned “the problem is when new taxes are imposed suddenly and without consultation”.

“The UK offshore industry needs a stable and predictable regime," she said.

"A windfall tax may not affect projects already under way but is likely to deter investments under consideration, for which funds have yet to be committed.

“The result would be a decline in oil and gas production in years ahead, just when the UK most needs reliable sources of energy.”

Ministers have spent months criticising the idea of a windfall tax because of its possible effect on investment.

“Rishi has made no attempt to win over critics of the policy,” a Cabinet source said.

But on Wednesday, a Conservative source said the arguments had been “tested rigorously” in the Treasury and wider government.

“There’s a high threshold that any package that we bring forward delivers more gain than pain, that the gain is worth the pain, that it does not jeopardise the investment,” he said.

“You don’t introduce random taxes that make the economic environment unpredictable.”

The Times reported that the previously announced £200 loan on energy bills would be replaced with a grant that would not have to be paid back, with the discount possibly increasing to as much as £400.

Other measures that have been discussed as part of a package could include a further increase to the "warm homes discount" to help low-income households cope with rising energy bills.

If Mr Sunak offers help through this discount, the payment will go directly to energy suppliers, easing fears that the companies could go to the wall this winter with customers unable to pay bills.

The need for extra help was illustrated by Ofgem chief executive Jonathan Brearley’s indication that the energy price cap will increase by another £830 to £2,800 ($3,500) in October.

Domestic energy prices will have risen by £1,500 in a year.

There have also been discussions around increasing the winter fuel allowance and making more cuts to council taxes.

Mr Sunak has also been under pressure from Tory MPs to offer a universal tax cut — perhaps an income tax reduction or the scrapping of VAT on domestic fuel — to prove he does not intend to keep putting up taxes.

He will need to be careful that any extra help he puts in to the economy does not add further to inflation, which is running at a 40-year high, with the Bank of England expecting it to pass 10 per cent in the autumn.

Mr Sunak’s ability to help beyond the £22bn package already announced will also be restricted by the state of the nation’s finances.

Updated: May 26, 2022, 8:01 AM