London Daily

Focus on the big picture.
Saturday, Nov 15, 2025

Cost of living: Why Rishi Sunak's populist windfall tax is facing a backlash

Cost of living: Why Rishi Sunak's populist windfall tax is facing a backlash

The chancellor may claim that a 'temporary Energy Profits Levy' is not a windfall tax but, as the popular saying goes, if it looks like a duck, quacks like a duck and waddles like a duck, then it probably is a duck.

The peculiar use of terminology is an attempt to disguise that this windfall tax - let's call it what it is - represents a significant victory for the Labour Party and the Liberal Democrats. Both first came up with this policy and Rishi Sunak has purloined it.

The self-styled 'low tax Chancellor' has just slapped a combined rate of taxes on UK oil and gas profits to 65%.

In doing so, Mr Sunak sought to confront those critics on his own benches that windfall taxes are 'unconservative' by highlighting similar measures in the past by Margaret Thatcher and George Osborne.

This was disingenuous.

Mrs Thatcher's windfall tax on the banks in 1981 - imposed by her chancellor at the time, Sir Geoffrey Howe - was imposed specifically because the banks were benefiting from a government policy.

Sir Geoffrey had raised interest rates - in those days this was done by the government and not the Bank of England - which would directly have inflated the profits of lenders. Sir Geoffrey was giving with one hand and taking from the other.

Mr Sunak is just taking. Moreover, both Sir Geoffrey and Mr Osborne were committed to cutting taxes for businesses. Mr Sunak is just about to raise taxes on businesses.

The big question - and one that is almost impossible to answer - is the impact that this will have on investment.

But the UK's offshore oil and gas industry, already the UK's most heavily taxed business sector, says there will inevitably be an impact on investment and employment.

Deirdre Michie, chief executive of the industry body Offshore Energies, told Sky News: "Previous windfall taxes, we can point to the data, that it does undermine investment.

"And at a time when the country needs to really focus on its security of energy supply and the energy transition, we have been arguing for stability and predictability in terms of the fiscal regime, that is working, it is generating significant returns for the Treasury that they can then use to address the consumer crisis, but at the same time can give the kind of investor confidence that is needed to keep investing in oil and gas and underpin the energy transition."

Ms Michie pointed out that the recent increases in profits come on the back of two years of significant losses in the sector - which supports 200,000 well-paid jobs - just as it had come through the previous downturn.

She added: "There are swings and roundabouts in this sector, we know that, which is why this change by the government, having the rules of the game changed by the government…could be a step backwards for the sector.

"Historically when this has happened, it doesn't work, it undermines investment and, for the last almost 10 years, we have had fiscal predictability and stability which has brought investment back into the basin."

She said that, unless new investments were made now, oil and gas production in the North Sea would "drop off a cliff" by 2030.

What will particularly concern businesses is the peculiarly open-ended nature of this windfall tax.

Mr Sunak said that, if oil and gas prices return to "historically more normal levels", then the tax would be phased out. But those words "historically more normal" are doing a lot of work there.

If the Chancellor knows what "historically more normal levels" of oil and gas prices are, he certainly isn't saying. The only certainty is that the legislation will be phased out at the end of December 2025 - so potentially this tax is going to be in place, potentially stymying investment, for the next three and a half years.

Equally alarming, from the view of business, will be the chancellor's revelation that he is considering "appropriate steps" to target "extraordinary profits" being made by electricity generating companies.

That he was unable to come up with details on this point rather points to the complicated nature of these businesses.

The industry can argue, reasonably, that, because of hedging strategies, it is not enjoying windfall profits in any case.

The chart showing 'spot' energy prices may point to a dramatic increase in prices but most of the electricity generators sell their output under longer-term prices that will inevitably be lower than the 'spot' price.

There may well not be any windfall profits for Mr Sunak to tax. And establishing what windfall profits there may be to tax will probably require a horrendously complicated process in which the generating companies are required to open up their books so HM Revenue & Customs can establish for itself the prices being achieved by them. That could take months.

The chancellor will argue he is mitigating the impact of a windfall tax by introducing what looks, on the face of it, to be quite generous investment incentives with a new 'super deduction' type of relief.

The Treasury said: "The new Investment Allowance, similar in style to the super-deduction, incentivises companies to invest through saving them 91p for every £1 they invest. This nearly doubles the tax relief available and means the more a company invests, the less tax they will pay."

Yet this may be less of an incentive to invest than Mr Sunak thinks. The big global oil players which have operations in the North Sea, such as BP, Shell and Total of France, have many different investment projects to choose from around the world when they decide how to deploy their capital.

Mr Sunak is, very crudely speaking, telling these companies that, if they invest more in the UK, they will pay less taxes.

But very few chief executives in any company, not just the oil and gas sector, would want to be told by any government how to deploy their capital. The oil and gas companies may take the view that, even with these incentives in place, they can invest their money more profitably elsewhere - particularly given the relatively high costs of North Sea exploration and production and the risk of another oil price crash at some point in future.

They may just assume it will be less hassle to take a financial hit from Mr Sunak in the short term.

And it may turn out to be even worse than that: the independent Institute for Fiscal Studies pointed out that investing £100 in the North Sea, with Mr Sunak's new allowance, will cost companies only £8.75.

IFS economist Stuart Adam added: "A massively loss-making investment could still be profitable after tax. It is hard to see why the government should provide such huge tax subsidies and thereby incentivise even economically unviable projects."

Quite. This policy lash-up could lead to a colossally inefficient misallocation of resources and capital.

As important in today's statement was what Mr Sunak did not say. High energy prices do not only hurt households - they also hurt businesses. However, as Mr Sunak flung around with gay abandon his billions to support households, there was nothing to support businesses - many of which are being pushed to the brink by higher energy bills.

The Chancellor's supporters will argue, as they seek to defend this impost, that only a handful of companies will end up paying it. The Treasury said today that, in recent years, fewer than 35 companies have made tax payments under the last windfall tax slapped on the sector - the 'supplementary charge' introduced by Gordon Brown in 2002 and raised by George Osborne in 2015 - and the top seven of these made 95% of payments.

Look, they will argue, at the share price reactions in BP and Shell - both of whose share prices rose by 1% this afternoon.

That, though, is not the place to look. Those are global companies for whom the North Sea is a very small part of their overall operations.

Instead, look at companies like Enquest, a player whose operations are focused on the North Sea and whose shares fell by more than 8%, or its peer Energean, down 2%. Or look at the electricity generating companies, still unclear on how much they will pay, with SSE down 4% and Drax down nearly 3%.

One final point is also worth bearing in mind about today's announcements.

Mr Sunak's giveaways are likely to add to inflation, as the consultancy Capital Economics noted: "The chancellor's actions are adding to the already intensive inflationary pressure. Other things being equal, this loosening in fiscal policy means that to bring down inflation to the 2% target, monetary policy will need to be tighter.

"This supports our view that the Bank of England will have to raise interest rates from 1% now to 3% next year."

Still, what is a punishing tax on a strategically important industry and a giveaway likely to stoke up inflation, when set against getting parties during lockdowns off the front pages?

Quack quack!

Newsletter

Related Articles

0:00
0:00
Close
UK Upholds Firm Rules on Stablecoins to Shield Financial System
Brussels Divided as UK-EU Reset Stalls Over Budget Access
Prince Harry’s Remembrance Day Essay Expresses Strong Regret at Leaving Britain
UK Unemployment Hits 5% as Wage Growth Slows, Paving Way for Bank of England Rate Cut
Starmer Warns of Resurgent Racism in UK Politics as He Vows Child-Poverty Reforms
UK Grocery Inflation Slows to 4.7% as Supermarkets Launch Pre-Christmas Promotions
UK Government Backs the BBC amid Editing Scandal and Trump Threat of Legal Action
UK Assessment Mis-Estimated Fallout From Palestine Action Ban, Records Reveal
UK Halts Intelligence Sharing with US Amid Lethal Boat-Strike Concerns
King Charles III Leads Britain in Remembrance Sunday Tribute to War Dead
UK Retail Sales Growth Slows as Households Hold Back Ahead of Black Friday and Budget
Shell Pulls Out of Two UK Floating Wind Projects Amid Renewables Retreat
Viagogo Hit With £15 Million Tax Bill After HMRC Transfer-Pricing Inquiry
Jaguar Land Rover Cyberattack Pinches UK GDP, Bank of England Says
UK and Germany Sound Alarm on Russian-Satellite Threat to Critical Infrastructure
Former Prince Andrew Faces U.S. Congressional Request for Testimony Amid Brexit of Royal Title
BBC Director-General Tim Davie and News CEO Deborah Turness Resign Amid Editing Controversy
Tom Cruise Arrives by Helicopter at UK Scientology Fundraiser Amid Local Protests
Prince Andrew and Sarah Ferguson Face Fresh UK Probes Amid Royal Fallout
Mothers Link Teen Suicides to AI Chatbots in Growing Legal Battle
UK Government to Mirror Denmark’s Tough Immigration Framework in Major Policy Shift
UK Government Turns to Denmark-Style Immigration Reforms to Overhaul Border Rules
UK Chancellor Warned Against Cutting Insulation Funding as Budget Looms
UK Tenant Complaints Hit Record Levels as Rental Sector Faces Mounting Pressure
Apple to Pay Google About One Billion Dollars Annually for Gemini AI to Power Next-Generation Siri
UK Signals Major Shift as Nuclear Arms Race Looms
BBC’s « Celebrity Traitors UK » Finale Breaks Records with 11.1 Million Viewers
UK Spy Case Collapse Highlights Implications for UK-Taiwan Strategic Alignment
On the Road to the Oscars? Meghan Markle to Star in a New Film
A Vote Worth a Trillion Dollars: Elon Musk’s Defining Day
AI Researchers Claim Human-Level General Intelligence Is Already Here
President Donald Trump Challenges Nigeria with Military Options Over Alleged Christian Killings
Nancy Pelosi Finally Announces She Will Not Seek Re-Election, Signalling End of Long Congressional Career
UK Pre-Budget Blues and Rate-Cut Concerns Pile Pressure on Pound
ITV Warns of Nine-Per-Cent Drop in Q4 Advertising Revenue Amid Budget Uncertainty
National Grid Posts Slightly Stronger-Than-Expected Half-Year Profit as Regulatory Investments Drive Growth
UK Business Lobby Urges Reeves to Break Tax Pledges and Build Fiscal Headroom
UK to Launch Consultation on Stablecoin Regulation on November 10
UK Savers Rush to Withdraw Pension Cash Ahead of Budget Amid Tax-Change Fears
Massive Spoilers Emerge from MAFS UK 2025: Couple Swaps, Dating App Leaks and Reunion Bombshells
Kurdish-led Crime Network Operates UK Mini-Marts to Exploit Migrants and Sell Illicit Goods
UK Income Tax Hike Could Trigger £1 Billion Cut to Scotland’s Budget, Warns Finance Secretary
Tommy Robinson Acquitted of Terror-related Charge After Phone PIN Dispute
Boris Johnson Condemns Western Support for Hamas at Jewish Community Conference
HII Welcomes UK’s Westley Group to Strengthen AUKUS Submarine Supply Chain
Tragedy in Serbia: Coach Mladen Žižović Collapses During Match and Dies at 44
Diplo Says He Dated Katy Perry — and Justin Trudeau
Dick Cheney, Former U.S. Vice President, Dies at 84
Trump Calls Title Removal of Andrew ‘Tragic Situation’ Amid Royal Fallout
UK Bonds Rally as Chancellor Reeves Briefs Markets Ahead of November Budget
×