Following the growing calls to impose a windfall tax on the profits of energy companies, to address the cost of living crisis, Chris Denning, corporate and international tax partner at MHA, says the Chancellor and business secretary should stick to their guns and hold out against the idea:
“A windfall tax on the profits of energy companies is a crude solution to the cost of living crisis. The Labour party have research showing that the total projected profits for North Sea oil companies in 2022/23 will exceed the combined cost to UK households of an increase in the energy price cap.* The idea is that this makes a windfall tax a fair and proportionate solution to rising energy costs but the analysis is simplistic.
“The calculation would need to take into account the potential impact on future investment, which the tax would likely deter, as well as the hit to institutional investor returns and address whether the tax would also give a tax advantage to non-UK tax resident foreign importers over domestic producers given the UK’s continuing energy import dependency.
“Many ordinary UK savers are members of institutional pension schemes with big investments in UK energy companies, so if a windfall tax impacted dividend payments and capital growth this would hit the pockets of ordinary pensioners.
“In addition UK oil and gas companies are already subject to Corporation Tax (CT) at 30% plus a 10% supplementary charge, which is more than double the standard CT rate of 19%.
So if excess profits are being earned they will already be generating “windfall” tax receipts at the existing tax rates.
“The biggest danger of windfall taxes is that they strike at the certainty of tax law that the UK is justifiably proud of. A windfall tax is in effect a retrospective tax. The potential damage to future investment should make any government extremely nervous.”