Sunak’s wrong-headed windfall tax will have unintended consequences

Will global investors accept the retrospective rule changes or will they start to avoid Britain?

It would be foolish to pretend that there is no merit whatsoever in the plans for a windfall tax on energy companies. The idea wouldn’t have generated such a groundswell of support if there was nothing in it. A levy would raise funds to provide desperately needed help for households being squeezed by the cost of living crisis. It wouldn’t be a lot of money

– but right now every little counts.

Some of the arguments being trotted out in opposition to the proposal – it will prevent investment, it will hit pensions, it is un-conservative (whatever that means) – feel a bit mealy mouthed in the face of the bleak reality faced by households having to choose between heating and eating. Nevertheless – and in the full knowledge I may be fighting a losing battle – I don’t think this Government can afford to implement a windfall tax.

Many of the recent converts to the proposal have caveated their support with the proviso any levy is “well designed” in both scope and duration. But how confident are we that this Government is up to that task, especially given that it looks like an announcement is being rushed out on a political timetable to mitigate the fallout from Sue Gray’s report?

At one point it appeared the tax would apply to renewable energy and nuclear companies. This seemed a tad short sighted given we’re desperate to both improve energy security and hit ambitious net-zero targets. Shares in many electricity providers duly slumped; they rebounded yesterday when the Government backed away. Does anyone else get the feeling this lot are making it up as they go along?

But, come to think of it, why should green energy companies be exempt if they’re doing well as a result of an unusual spike in energy prices? Because that’s where the logic of this kind of a retrospective levy takes you. Once you decide that some companies are making “outsized” profits because of the war in Ukraine, you’ll soon find others are too. Where do you draw the line?

You could argue that traditional energy companies have benefited from state support. However, that’s already acknowledged by the fact that oil and gas firms operating in the North Sea are taxed differently, paying 30pc corporation tax on their profits (compared to 19pc for other companies) with a supplementary 10pc rate on top.

It’s not as if renewable energy companies haven’t enjoyed years of explicit support in state subsidies. Indeed, we’ve just been through a period when almost every company was eligible for state support in the form of furlough and emergency loans.

What’s more, we already have a system that ensures companies pay more in tax when they make bigger

‘A windfall tax would likely reinforce the view the Government makes up policy on the hoof ’

profits – as was amply demonstrated by the Office for Budgetary Responsibility’s latest report on the national finances. Money flowing into the Treasury coffers was up 18.5pc in April compared to the same month last year and £6.4bn higher than the fiscal watchdog’s forecasts.

Income tax receipts were boosted by high bonuses at the start of the year – those pesky bankers – while VAT and corporation tax “also surprised materially to the upside”. This extra revenue – “windfall”? – is over three times more than the £2bn Labour claims its proposed windfall tax would raise. That suggests the Government already has the wherewithal to help households without raising more debt.

Then there is the question of unintended consequences. A good example of the potential pitfalls here is HSBC. At the start of the pandemic the Bank of England demanded lenders stop paying dividends to shareholders. Partly this was a prudential measure, but partly it was political: it wouldn’t look good. UK pension schemes don’t have big holdings of UK equities. Therefore, a cessation of dividends or a windfall tax doesn’t result in a huge hit to British pensioners, as some like to claim. But that’s not to say no one suffers. HSBC has a big retail investor base in Hong Kong that is furious the dividend was stopped and is currently rallying behind the calls from Chinese insurer Ping An for the bank to be broken up.

It is this kind of knock-on unforeseen effect that illustrates why the broad principle of governments and regulators setting the rules and tax regime, clearly signalling future changes and not imposing them retrospectively is so important.

A windfall tax won’t change the investment plans of oil and gas companies – of course, they weren’t relying on these profits. But this misses the point. The real question is whether global investors will passively accept the goal posts being shifted or start turning their noses up at the UK.

Sure, there’s plenty of precedent and, yes, Margaret Thatcher imposed windfall taxes. Her chancellor, Geoffrey Howe, used a bank levy to tax excess profits in 1981 before doing the same to oil and gas companies. However, global capital was far less fleet of foot back then. More importantly, Thatcher’s government was unmistakably pro-business and its overwhelmingly inclination on tax was to cut.

Boris Johnson’s government is the polar opposite. A windfall tax would therefore likely reinforce the prevailing view it makes up policy on the hoof depending on which way the political wind is blowing and when in doubt, its default reflex is to wallop business.

That’s why vision and competence are so important. They buy governments the licence to be flexible and pragmatic in times of crisis. It’s not as simple as saying a policy is good or bad, right or wrong – a lot depends on the quality of the administration that is implementing it.