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  • Emma Walsh

Windfall Tax Leads Emergency Support Package

After months of denying calls from across Parliament for a windfall tax, the Chancellor has reversed his stance and announced plans to tax the profits of energy companies as part of an emergency package to help households struggling with the spiralling cost of living crisis.

The windfall tax, renamed the Energy Profits Levy, is part of Rishi Sunak's £15bn support package and will be charged on profits of oil and gas companies at a rate of 25%.

The levy will raise around £5bn over the next year, and not to deter investment, Sunak also announced a new 80% investment allowance to encourage firms to invest in oil and gas extraction in the UK. The Treasury confirmed that eligible businesses will overall get a 91p tax saving for every £1 they invest, "providing them with an additional, immediate incentive to invest".

The Chancellor will use the levy to convert the £200 October loan into a £400 grant, a one-off £650 cost of living payment for the lowest households and support for pensioners and disabled people. However, in the days leading up to the Chancellor's announcement, tax commentators had raised questions about whether the introduction of the levy makes for good tax policy making.

"We have a collective responsibility to help those who are paying the highest price for the high inflation we face. That is why I’m targeting this significant support to millions of the most vulnerable people in our society. I said we would stand by people and that is what this support does today," the Chancellor said.

"It is also right that those companies making extraordinary profits on the back of record global oil and gas prices contribute towards this. That is why I’m introducing a temporary Energy Profits Levy to help pay for this unprecedented support in a way that promotes investment."

To Combat Inflation

Sunak explained throughout the lunchtime statement that the intervention was part of the Treasury's efforts to get inflation under control. He said that the government has three specific tools to combat and reduce inflation: independent monetary policy, fiscal responsibility and supply side activism.

"Fiscal support should be timely, temporary, and targeted. Timely because we need to help people when the shock is at its worse. Targeted because unconstrained stimulus will make the problem worse and temporary because if we do not meet our fiscal rules and ensure the public finances are resilient in the longer run, we create even greater risks on inflation, interest rates and the trend rate of economic growth," he said.

Sunak also noted that in the autumn, presumably as part of the Budget, the government will bring forward more tax cuts and reforms.

Longstanding Calls For The Levy

The windfall tax was originally suggested ahead of the Spring Statement in March, but the Chancellor opted against implementing them at that time; instead choosing to increase the national insurance threshold for employees and the self-employed (not employers) and cut road fuel tax by 5p.

But as the months have passed since, Sunak’s tax measures have failed to stem the rising cost of living crisis as households brace for the prospect of a further £800 increase in energy costs in the Autumn while inflation has just hit a 40 year high of 9%.

After previously waving off calls for an emergency Budget and a windfall tax, some may see today’s announcement as a political distraction as it comes the day after the publication of the much anticipated Sue Grey report into the 10 Downing Street parties.

Emergency Budget

As the cost of living pressures intensify, the calls for an emergency Budget have also grown, including the shadow Chancellor Rachel Reeves in her response to the Chancellor's cost of living announcement.

While the prudent Chancellor had resisted, hoping to wait until the Autumn 2022 Budget, a 20% increase in the government tax receipts has no doubt given him more headroom to roll out these announcements.

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