I am very happy to explain why I and all other Conservative MPs voted against a Labour Party amendment to the Queen’s Speech last night in favour of a ‘windfall tax’ on unspecified oil companies which would magically solve the cost-of-living crisis. On the face of it raising additional taxes from multinational oil companies who will benefit from a rise in world oil prices looks attractive. But this was simply the latest attempt by the Labour Party to try to make party political capital out of a very serious situation which many of our constituents are finding very difficult. Worst of all, their figures just didn’t add up and I am afraid that it was a cynical con that there is an easy solution to this global problem.
We were first told that a windfall tax would raise £1.2bn then £2bn and then last night £3bn and that they would give all households £600. In fact, £3bn gives each household just over £100 and rather less than the £150 council tax refund the Government has already distributed to every household. On top of this, the Government is offering households a £200 deferred loan on their council tax and a large discretionary fund is being made available to all local authorities to give grants urgently to those families most in need of help. All this is on top of the doubling of the existing Household Support Fund to £1bn and other targeted measures.
I acknowledge that this will only go a small way to helping some people especially if the high energy prices which are at the heart of the crisis continue into next year, caused by the easing of the pandemic and the sanctions against Russia after invading Ukraine. However, it is a good start, and the Chancellor is actively looking at other measures which will bring greatest benefit to those who most need it. One of these measures may be scrapping the 5% VAT rate on energy, only possible because we are now no longer subject to EU tax rules. The problem there though is that with energy bills going up by 50% or potentially doubling, that 5% only scratches the surface. It also benefits the richest with the highest energy usage, the most. A more targeted measure to help the less well off would be more effective.
But the bigger issue is that there is a risk of ‘killing the golden goose.’ Oil companies already pay tax in the UK at a rate of 40%, more than double the current corporation tax rate of 19%. That is made up of a higher rate of 30% and an effective existing windfall tax of a further 10% so we are talking about a windfall tax on a windfall tax here.
Only a small part of the profits of the oil majors such as BP and Shell are produced in the UK and these companies pay tax to other countries in the areas where they make profits on other overseas operations. So, the large ‘windfall profits’ which some companies are benefitting from due to high oil and gas prices are mostly from overseas not subject to UK tax. It should also be pointed out that in 2020 due to the crash in the oil price because of COVID, BP and Shell made ‘windfall losses’ of £15.8bn and £16bn respectively yet no one was suggesting any bail out to compensate them at that time. If we unilaterally ‘clobber’ international companies in the UK then they are entirely at liberty to concentrate their business activities and investment elsewhere. At a time when many European neighbours, overly reliant on Russian oil and gas are suffering hugely from energy supply problems, we must not do anything that threatens the security of our own supply from the North Sea. We do not want to create a situation in which investment tails off because we have frightened off oil companies with even higher taxes, disincentivising them from continuing to invest here.
As you will know I am a big fan of the UK’s drive to net zero carbon and a rapid reduction of our reliance on fossil fuels and prioritising of renewable energy. However fast we want to achieve this, we will continue to need fossil fuels during transition for some years to come and we cannot universally just ‘shut-up’ shop in the North Sea, so we will continue to need companies such as BP and Shell to invest there. The international oil companies are also amongst the biggest investors in renewable energy sources, not least hydrogen, and we are relying heavily on them to lead the charge to net zero and the fight against climate change. Again, a random windfall tax threatens to reduce that vital investment in the sustainable fuels of the future. In addition, BP has recently announced its withdrawal from Russia because on sanctions and they will take a hit of some $25bn. Shell also faces considerable costs from closing its Russian operations.
For all these reasons, simply hitting the oil companies with a windfall tax which may sound easy and attractive in principle is not all it is cracked up to be and risks some very unwelcome unintended consequences. It was therefore very misleading and opportunistic of the Labour Party to suggest otherwise, and I was happy to expose that by voting against that motion in favour of looking at other more realistic and sustainable solutions.
There are therefore other measures that the Chancellor is now looking at and that includes the additional revenue that the Treasury is currently earning from existing taxes as a result of this year’s likely increased profits. That is a more realistic solution and one where I would be happy to support the Chancellor. Again, there are knock-on effects in that the Chancellor is using this additional tax revenue to fill funding gaps in public services elsewhere and help pay off the £440bn cost of the pandemic. However, given the imminent and severe threats faced by many people through the largely energy price fuelled cost of living crisis, I would certainly support using part of that money to help those most vulnerable families on top of the various measures already announced.
I hope that this makes the position on windfall taxes clear.