Fri. Jan 21st, 2022

windfall tax is an appeal to politicians of all kinds. The Thatcher, Blair and Cameron governments have chosen to make money from exceptional profits made by various banks, utilities and North Sea operators. But tax attacks, while pleasing crowds, can be seriously counterproductive. British Chancellor Rishi Sunak must resist calls to impose a one-off levy on oil and gas companies.

The temptation is strong. Families are facing a 50 percent increase in their energy bills. The Liberal Democrats’ proposal for a £ 5 billion “Robin Hood” tax on gas and oil profits to support vulnerable families has political appeal. Hostility is growing towards companies like BP, whose boss Bernard Looney recently described it as a “cash machine”.

There are precedents. Business Secretary Kwasi Kwarteng told MPs in September that although he was not a fan of windfall taxes, he went to Spain’s fee on companies that have benefited from the energy crisis. Spain, however, adjusted it after companies argued it was targeting illusory profits. Their sales are mostly via long-term contracts rather than spot prices. Similar arguments apply in the UK.

George Osborne’s 2011 £ 2 billion North Sea producers raid, although not a one-time tax, is also relevant. Its unexpected increase from 60 per cent in the supplementary levy to 32 per cent was justified by the unexpected gains made on oil prices which were much higher than those taken into account in previous investment decisions.

The additional levy was gradually reduced to 10 percent in 2016, but profits from the North Sea are still taxed very high. Companies pay up to 40 percent corporate tax, roughly double other sectors.

They are subject to a special tax regime that encourages investment through advance capital grants. Nevertheless, it causes uncertainty that deters investors.

Windfall tax encourages businesses to offset the risk of tax attacks in investment plans. Unless it is a response to a one-time event, the imposition of a retroactive tax will change behavior. Only a keen optimist can argue that high gas prices are transient.

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