The case for windfall taxes grows strong

THE scale of the uncertainty triggered by the coronavirus may have required Rishi Sunak to scrap plans for a multi-year spending review but he can still make a start on a long overdue reform of the tax system.

When he announces a one-year spending review next week the Chancellor will set out how he plans to support the economy while starting to recover some of the billions spent providing help to firms so far.

Government debt has ballooned to levels that orthodox economists would say must be reduced.

It is crucial, however, that the Chancellor does not try to rein in spending too soon.

It could be well into next year before a vaccine can be made available widely enough to allow restrictions associated with the coronavirus to be eased significantly. The Chancellor must ensure that companies are given the support they will require to cope with what could be months of more uncertainty, with the emphasis on sectors that have been hit especially hard.

With Central Banks likely to keep interest rates at record lows for some time the Chancellor should take advantage of the opportunity he will have to raise plenty of cheap debt.

He should not increase the rates of tax payable generally by businesses or those that apply to people on average incomes for fear of choking off spending.

But while he may not want to make big changes to the tax system the Chancellor has the opportunity to begin to reform it in a way that could make it fairer while helping to maximise the revenues generated for the Exchequer.

A starting point could be the recognition that the tax system has to be better able to reflect the different experiences of different kinds of firms.

The furlough programme recognises that some kinds of businesses have been forced to close down by the coronavirus. As things stand the tax system does not fully reflect the fact that some sectors have effectively received a boost as a result of the coronavirus.

The obvious beneficiaries include supermarket groups, and bigger suppliers of health and cleaning products and delivery businesses. While businesses in those sectors have done nothing wrong, some will have been able to generate unusually high profits as a result of the coronavirus crisis and resulting changes in behaviour. To leave them subject to the standard corporation tax rate would not be an appropriate response to the unusual nature of the improvement in their trading fortunes.

Given that, the case for the Chancellor to make use of windfall taxes on sectors that have prospered is becoming increasingly strong.

George Osborne imposed a £10 billion windfall tax on the North Sea oil and gas industry in the 2011 Budget while serving as Chancellor in the Conservative Liberal Democrat coalition.

His experience suggests any new windfall taxes will provoke cries of outrage from firms in sectors that are affected and warnings that they will choke off investment.

However, one of the attractive things about windfall taxes is that they can be applied on a one-off basis when conditions are suitable or amended as they change. Mr Osborne cut North Sea taxes after a long boom in investment that was fuelled by high oil prices ended in 2014.

The Chancellor also needs to act to clamp down on moves by companies to shift profits to countries where they can pay less tax on them.

Campaigners have spent years trying to get the transfer pricing regime tightened to stop this sort of behaviour.

They will likely welcome a Financial Times report that said HMRC has written to thousands of firms in recent months warning they must ensure their transfer pricing is appropriate. The letter raised the prospect that penalties could be imposed on firms whose practices are found wanting. Mr Sunak must ensure HMRC has the resources to complete the investigations proposed.

He should work with ministers in other countries to encourage international co-operation on transfer pricing, rather than seeing states pursue a beggar-my-neighbour approach that prioritises their own interests.

Against that backdrop, he should also support efforts to ensure that internet giants such as Amazon pay taxes that reflect the huge growth in their businesses. This has been turbo-charged by the fallout from the coronavirus crisis.