What is a windfall tax?
A windfall tax is levied against companies deemed to have made excessively high profits, or a ‘windfall’, from circumstances they themselves did not engineer. They are time-limited and are usually applied retrospectively on profits.
In May 2022, after months of discussion and political pressure, the Chancellor announced a ‘25% surcharge’ on top of the 40% headline rate of tax applied to profits in the oil and gas sector. It is a response to the ‘extraordinary profits’ in the sector following the global surge in energy prices driven by the war in Ukraine.
This is a temporary surcharge on future profits rather than a one-off, retrospective levy. Companies will pay the 25% surcharge until oil and gas prices return to ‘historically more normal levels’, with government promising to legislate to phase it out by the end of 2025 at the latest. That would mean the government would have introduce a new law to reinstate it, if it wanted it to continue.
The government estimates the surcharge could generate £5 billion in the first year. Oil and gas companies will, however, be eligible for 90% tax relief if they invest in oil and gas extraction in the UK.