Cost of living: Chancellor Rishi Sunak confirms U-turn on windfall taxon May 26, 2022 at 11:42 am

The government has U-turned on its opposition to a windfall tax on oil and gas firms, announcing it will introduce a levy to help tackle rising bills.

Ministers had rejected the idea – put forward by opposition parties – that would see a one-off charge imposed on the company’s record profits.

But Chancellor Rishi Sunak said his levy would “tax extraordinary profits fairly and incentivise investments”.

And he promised to provide “significant support to the British people”.

The government faced accusations that it had timed the announcement to distract from the release of the Sue Gray report into lockdown-breaking parties in Downing Street during the pandemic.

But the claims were denied by No 10.

Households across the country have faced soaring costs in recent months as the prices of food, fuel and energy have all rocketed, with inflation hitting a 40-year high.

The government has been under growing pressure to act, especially after energy regulator Ofgem warned of an additional rise to bills of £800 in the autumn.

The Liberal Democrats first put forward the idea of a windfall tax on the profits of oil and gas companies – which have peaked as the economy restarted after the pandemic – in November, with Labour outlining its own version in January.

The parties said the money raised could then go towards helping those households hardest hit by the cost of living increases.

Initially, the idea was rejected by ministers, including Boris Johnson, who warned it could “deter” investment into the country.

But both Mr Johnson and Mr Sunak subsequently softened their stance, and now the policy has been confirmed.

Making a statement in the Commons, the chancellor said the inflation faced by the UK was causing “acute distress for the people of this country” and he knew people were worried.

But, Mr Sunak added: “This government will never stop trying to help people, to fix problems where we can, to do what is right – as we did during the pandemic.”

He confirmed the government would introduce a “temporary targeted energy profits levy” charged at a rate of 25% on profits of oil and gas companies to fund “significant support for the British people”.

However, he said his “sensible middle ground” plan included a new investment allowance, so “for every pound a company invests they will get back 90% in tax relief – the more the company invests the less tax they will pay”.

The chancellor added: “We should not be ideological about this, we should be pragmatic

“It is possible to both tax extraordinary profits fairly and incentivise investments.”

Mr Sunak said the tax would then be removed when energy prices returned to normal levels.

By David Wallace Lockhart, BBC political correspondent

Ministers have been facing calls to do more to help with the cost of living for quite some time. So why today?

As recently as the weekend, Downing Street sources were indicating there would be no imminent announcement on windfall taxes.

And it was only a couple of weekends ago Business Secretary Kwasi Kwarteng called it a “bad idea”.

So why the change of heart?

Well, ministers have been clear for some time that more help is on the way. And they did get a clearer idea of future energy prices this week.

But – to be more cynical – the government had a particularly uncomfortable day on Wednesday with the publication of the Sue Gray report into Downing Street gatherings.

Boris Johnson has made it clear that he’s desperate to stop talking about parties. An announcement of billions of pounds of assistance for households certainly helps to move the agenda on.

Downing Street deny that the timing of this has anything to do with Partygate. But plenty of opposition MPs won’t buy that argument.