Windfall taxes are in the spotlight after Labour’s call for one on North Sea oil and gas producers to support relief for hard-pressed households with their energy bills.
The proposal has been treated with scepticism because, with North Sea oil production already in decline, it would risk deterring investment in the sector.
Oil and Gas UK, the industry body, has pointed out the Treasury is already looking forward to an extra £3.5bn in taxes from the sector during the two years from last April as a result of higher oil and gas prices.
It also points out that oil and gas companies already pay an elevated rate of corporation tax at 30% on their upstream profits, compared with 19% for most other companies, while they also pay a “supplementary charge” of 10% – the latter measure being introduced by Gordon Brown, the former chancellor, 20 years ago.
So the sector is already being taxed at more than twice the rate that a typical business is.
There are also concerns that, should a windfall tax further deter investment in the North Sea, it would leave the UK even more heavily dependent on oil and gas imports from overseas at a time when greater self-sufficiency in energy is seen as desirable.
Nonetheless, there is a history of levying windfall taxes on businesses in this country.
And, although the latest proposal for one comes from Labour, it may surprise some people to know that some of the most prominent uses of the levy were by Margaret Thatcher’s government.
Windfall tax raids from Sir Geoffrey Howe to Gordon Brown
Sir Geoffrey Howe, Mrs Thatcher’s first chancellor, raised taxes on North Sea oil and gas producers in November 1980 in a move that was seen in some quarters at the time as a windfall tax.
The following spring, in his 1981 budget, Sir Geoffrey also, controversially, levied a windfall tax on the banks.
It was seen at the time as a move that risked leaving banks as under-capitalised and weakening their ability to lend.
But Sir Geoffrey argued that the tax was reasonable because, with interest rates having risen to 17% in 1979, the banks were benefiting (the spread between what a bank charges borrowers and pays depositors typically increases as interest rates rise).
As Mrs Thatcher herself noted in her memoir, the Downing Street Years: “Naturally, the banks strongly opposed this, but the fact remained that they had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer.”
Sir Geoffrey ordered the banks to pay 2.5% of the money in their non-interest-bearing current account deposits, a move that raised £400m at the time, getting on for almost £2bn in today’s money.
The banks were furious, as indeed were some Conservative MPs, as it accounted for nearly a fifth of their annual profits.
However, when the banks subsequently raised their dividends by roughly a fifth, their argument was somewhat weakened.
The biggest windfall tax of all time, though, was announced by Mr Brown in the first budget of Tony Blair’s government in 1997.
This was levied on more than 30 water, telecoms and energy companies, as well as the airport operator BAA, all of which had been privatised by the Conservatives during the previous 18 years and raised £5.2bn.
The justification at the time was that these businesses had been undervalued at the time they were sold by ministers.
That was almost unarguable – but there were criticisms at the time that the tax was still an inefficient instrument in terms of how it had been levied.
As the independent Institute for Fiscal Studies pointed out in a research paper later that year: “As a tax on companies rather than on individuals, it can only capture some of those windfall gains: some of those who received windfall gains will bear the tax, while others who sold their shares before it was suggested will not, and the tax will also be borne by later investors who made no windfall gains at all.”
Since then, no government has sought to impose windfall taxes again, for good reason.
First is the fact that windfall taxes primarily hurt ordinary people.
Why governments have been wary of windfall taxes
Either those taxes are borne by the shareholders – which, via pensions, savings and insurance policies, will be all of us – or, if the company responds to a windfall tax by putting up its prices, by its customers.
Alternatively, they hit investment, as funds earmarked for capital expenditure projects are instead diverted into paying taxes.
In the case of a windfall tax on the North Sea, that might have an impact on the transition to net zero, since both BP and Shell – which still have interests in the UK Continental Shelf – are both seeking to deploy large sums in renewable and electrification projects.
There is also an argument that windfall taxes ultimately hurt consumers because they have the effect of reducing competition.
A company hit with a windfall tax on a particular activity has no option, in the short term, but to pay it.
Another company that had been thinking of moving into that activity does not. So that hurts consumers.
Such taxes are also difficult to impose.
The latest to learn this is Pedro Sanchez, the Spanish prime minister, who in September last year imposed a windfall tax on power utilities – including Scottish Power’s parent company Iberdrola – worth billions of euros because, he claimed, generators and suppliers were enjoying “extraordinary benefits” from higher wholesale prices.
The energy companies responded by warning customers that they would have to put up their prices as a result, prompting at least one steelmaker to warn that they would have to shut down.
The government subsequently rowed back on the proposal.
The episode highlighted the dangers and difficulties involved in trying to intervene in a market where prices are determined by global, not local, supply and demand.