BP has reported record quarterly profits as it reaps the benefits of higher oil and gas prices, along with rival Shell, months after the UK government introduced a windfall tax on energy firms.
However, the new tax only applies from 26 May – so the majority of BP’s profits won’t be hit by it.
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What is a windfall tax?
A windfall tax is a one-off tax imposed by a government on a company.
The idea is to target firms that were lucky enough to benefit from something they were not responsible for – in other words, a windfall.
Energy firms are getting much more money for their oil and gas than they were last year, partly because demand has increased as the world emerges from the pandemic, but more recently because of supply concerns due to Russia’s invasion of Ukraine.
How will the new windfall tax work?
Former Chancellor Rishi Sunak, who is now in the running to be the next prime minister, described the tax as a 25% Energy Profits Levy. The Treasury expects it to raise about £5bn in its first year.
The important feature of this extra tax is that any money the companies may have lost in previous years, or money they are spending on things like decommissioning North Sea oil platforms cannot be used to reduce the amount of tax they pay.
In recent years, such methods have meant that BP and Shell, for example, have paid almost no tax in the UK.
How much tax do oil companies pay?
Oil and gas firms operating in the North Sea are taxed differently to other firms.
Taxes on their profits are higher – they pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. Other firms pay corporation tax at 19%.
BP and Shell both received more money back from the UK government than they paid every year from 2015 to 2020 (except 2017, when Shell paid more than it received).
How much have energy firms been making?
BP reported its biggest quarterly profit for 14 years, making £6.9bn in the three months to June.
Shell recorded even higher second quarter profits of £9bn.
However, despite the profits, the majority of the April to June takings won’t be hit by the government’s windfall tax as it only applies from 26 May.
But both have written off a lot of money as a result of exiting from investments in Russian oil firms following the invasion of Ukraine.
BP and Shell have both spent billions recently on what are called share buybacks, which is what companies do when they have money they can afford to spend on boosting their share price.
Would a windfall tax affect investment?
BP plans to spend a maximum of £18bn on the UK’s energy system by the end of 2030.
Chief executive Bernard Looney was asked by The Times on 3 May which of BP’s planned UK investments would not go ahead if there were a windfall tax.
Mr Looney replied: “There are none that we wouldn’t do.”
Shell plans to spend £20bn-£25bn on UK energy over the next 10 years.
What have politicians said?
The government adopted the windfall tax policy, having previously rejected it. A windfall tax had been championed by Labour, Liberal Democrats and the SNP.
Boris Johnson, the outgoing prime minister, had previously said such a tax would deter investment: “I don’t like them. I don’t think they are the right way forward. I want those companies to make big, big investments.”
Meanwhile, Mr Sunak had previously said he was not “naturally attracted” to it, but was “pragmatic” about introducing it.
But a new Conservative Party leader, and prime minister, could lead to changes in policy.
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Critics of a windfall tax argue that it might affect the money paid out to pensioners by some pension funds – as these funds benefit from energy firms’ profits.
But it is important not to overstate the impact of this. Pension funds invest across countries and industries, so such a tax is unlikely to make a noticeable difference.
Have we had UK windfall taxes before?
The UK’s best-known windfall tax was in 1997, when Labour Chancellor Gordon Brown placed the tax on companies formed after the Conservative governments’ earlier privatisation of nationalised industries, including BT, Scottish Power and United Utilities.
The tax raised £5.2bn over two years (£8.7bn in today’s money) according to the Institute for Fiscal Studies.
Conservative Chancellor Geoffrey Howe imposed a similar levy on banks in 1981, arguing they had benefited from high interest rates. He also imposed a special tax on North Sea oil and gas firms.
