Chartered Institute of Taxation comments on windfall tax announcement

Responding to Chancellor Rishi Sunak’s announcement today (Thursday) of a temporary levy on the profits of oil and gas companies to ease households’ higher than normal energy bills, CIOT Director of Public Policy John Cullinane said:

“Emergency, temporary, unconsulted-on measures are bad for the tax system and should only be introduced in the most exceptional circumstances. But these are pretty exceptional circumstances, and the new tax appears quite carefully targeted.

“The biggest risk with a temporary windfall tax like this is that businesses generally may conclude that, when they make money in the UK, a retrospective tax will come and claw back much of those profits, so it undermines the investment proposition for the UK. This is possible but given how exceptional the situation is right now in the energy market it seems unlikely too many wider conclusions will be drawn about this setting a new precedent.”

Since 1980s governments have used windfall taxes as a one-off tax levy on companies deemed to have made unreasonably high profits, normally due to unusually favourable market factors.

John Cullinane said:

“In 1981, Conservative chancellor Geoffrey Howe introduced a one-off levy on banks, charged at 2.5 per cent of their non-interest-bearing current account deposits. This was expected to raise £400 million (equivalent to around £3 billion in today’s terms). The banks strongly opposed this, yet the Government felt the banks had made their large profits because of the policy of high interest rates rather than because of increased efficiency or better service to the customer.

“Labour’s 1997 windfall tax on utilities had a long lead-in time because Labour outlined it as a potential policy back in 1993. That government wanted to target utilities that, in their opinion was privatised at too small a gain for the taxpayer.”