On 20 September, The Guardian published an article reporting on fresh calls for a windfall tax on ‘companies that prospered during covid’. The article was based on a report by Tax Justice UK, which identified six companies that were said to have made an additional £16bn of profits during the pandemic, as a result of either direct Government spending or from economic changes accelerated by the pandemic. A 10% levy on those profits could, in theory, raise up to £1.6bn. A similar proposal by the Resolution Foundation last year suggested a ‘pandemics profits levy’ of 10% on the ‘supra-normal’ profits of the small number of firms that had done better than normal in 2020 but calculated that this could raise a smaller one-off sum of £130m.
Windfall taxes have been used before, most notably when Gordon Brown imposed a tax on the privatised utilities in 1997. That tax raised around £5.2bn, and Lucy Chennells of the Institute for Fiscal Studies commented at the time that ‘a one-off tax based on past profits should be efficient, provided that the statement that it is one-off is credible’. However, any such tax needs to be measured against the guidelines of ‘economic efficiency, fairness and administrative feasibility’.
So how do the current windfall tax proposals measure up against those guidelines?
In terms of economic efficiency, the argument that this would be a one-off tax in response to the extraordinary events of Covid is a reasonable one – and it is well over 20 years since the last windfall tax. However, in comparison to the 1997 tax, the current proposals are less convincing.
First, the likely sums are relatively small: with total UK tax receipts of around £700bn, and Corporation Tax of £60bn to £70bn, receipts of up to £1.6bn will not move the total dial very much.
And I’m not convinced that even £1.6bn is achievable. One of the firms named is Rio Tinto, and while it made $15bn of profits before tax in 2020, only 0.5% of its sales were to the UK, suggesting that UK profits are of the order of a mere £60m. Of the other firms named, Serco commented that 60% of its profits came from outside the UK, while Tritax said that: ‘The increase in our profitability during 2020 is a direct consequence of our long-term strategy and the funds we have raised and invested to expand the business’, i.e., not as a result of Covid.
The biggest issue is in relation to fairness: a windfall tax of this nature would clearly be retrospective, and it has long been Government policy to set tax rates in advance.
While retrospective tax changes are generally seen as acceptable if they are narrowly targeted at avoidance, imposing a tax today on profits made last year is much harder to justify. In 2010, the CIOT published a discussion paper which said that while retrospective legislation was acceptable to correct anomalies, and it was reasonable in certain circumstances to announce changes with immediate effect, there should be a presumption against any more general use of retrospective legislation.
Retrospective legislation may also contravene the UK’s obligations under the European Convention of Human Rights, although it is not prohibited provided the balance between the rights of individual taxpayers and the general public interest is maintained.
The Chartered Institute of Taxation also pointed out that any retrospective legislation will, to some extent, damage the key principle of certainty in the UK tax system. This is particularly important for businesses, which will make decisions about investments in the light of current tax rules – accepting that those rules may change in the future, but not expecting them to change for the past.
Finally, would a windfall tax be administratively feasible?
Yes, if it is simply an increase in the rate of Corporation Tax (which has, of course, already been announced prospectively from 2023). But if there is to be some sort of measurement of ‘excess profits’, and if they are to be taxed only if they are excessive for reasons related to Covid, then it will all become very complicated very quickly.
It’s interesting to go back to the original 1997 example. That had been part of Labour Party policy since 1992, and it was explicitly mentioned in its 1997 election manifesto. So, while technically it was retrospective, it was something that could clearly have been anticipated. It was levied on the increase in value of a narrow group of companies following privatisation and was intended to compensate taxpayers as a whole for what were seen as undervaluations at the time of flotation, together with a regulatory regime which was perceived as being insufficiently strict. And the calculation was fairly straightforward too, being based on a percentage of the increase in value of this group of quoted companies since privatisation. So, there was both an intellectual and practical coherence to the policy.
Overall, the current windfall tax proposals seem poorly targeted and will raise a relatively small amount of money. While the Chancellor will have many difficult decisions to make in his forthcoming Budget, I hope he doesn’t decide to take up this idea.
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First published in Tax Journal Thursday 14 October.
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