With two new taxes introduced since September 2021 and two more up for debate, how does this all fit within the UK’s sense of fair play? And is it time for a windfall tax on excess energy profits?
In the UK, both policing and taxation are effectively consensual. Without this climate of consent, without this sense of fair play, law in general and tax law in particular would become unenforceable. In our representative democracy, there is no shortage of views on who should pay how much tax and on what. As we have noted previously, relatively few people seem to wish to pay more tax than they are required to by law, although mechanisms exist for them to do so if they wish. Meanwhile, many more people feel that others should pay extra tax, and the Treasury is currently busy deciding which new taxes should be introduced.
The health and social care levy was announced in September 2021. As taxes go, it was easy for HMRC to set up and collect as the identity of all the first-stage payers is known and, for the first year from 6 April 2022, it will take the form of a simple increase in the rate of NICs. From 6 April 2023, the levy will become a stand-alone tax payable by more people. Early opposition to the levy reflected concerns that it was excessively weighted against low-income groups. Now it has been established that the overwhelming majority of the levy will be paid by employers and high earners, it seems almost certain to come into force as intended.
The introduction of a new tax usually attracts considerable interest. Not so the public interest business protection tax which the government has introduced to reduce the number of gas and energy supplier businesses going into special measures. The Treasury has been particularly concerned that energy suppliers may realise valuable assets for their own and their shareholders’ benefit, precipitating the collapse of the business. With effect from 28 January 2022, if the value of the asset exceeds £100m then the new tax will be levied at the rate of 75% of the asset value. It is intended that this new tax will be in place for one year only, but it may be extended to 2025.
Proposals for a wealth tax have been much more contentious. These proposals took two forms. First, a one-off wealth tax to help meet the costs of the pandemic. Second, a periodic wealth tax to reduce inequality in the UK. Hand in hand with these were proposals to reform inheritance tax and replace it with a lifetime receipts tax, while also increasing the rates of capital gains tax. The chancellor is understood to be opposed to all these ideas.
That brings us to the most contentious proposal of all – for a windfall tax on the profits of companies which have benefited from excess prices charged in pandemic procurement contracts, and on the profits of North Sea oil and gas operating companies. While the former may escape additional taxes, the huge profits of the oil and gas companies reflect a hydrocarbon market in which the sellers are winners, while the buyers – individual consumers and businesses – must endure a cost-of-living crisis.
The prime minister himself is keen to rebut calls for a windfall tax on oil and gas profits, arguing that higher taxes would ‘clobber’ the investment in the North Sea which is necessary for energy security during the transition to net zero. To put it politely, that statement is at odds with reality. The published business plans of companies such as BP already fully factor in new North Sea investments. To the extent that company cashflows exceed their budgets, the excess goes to shareholders through dividends or share buybacks or is used to pay down corporate debt.
Faced with that inconvenient truth, the government seems only to have two reasonable courses of action:
- impose an outright windfall tax on the super-profits of the North Sea operating companies, using the proceeds to protect consumers and businesses from soaring energy prices; or
- introduce a windfall tax with deductions for genuinely new, additional expenditure on more renewables, green hydrogen production and clean-energy infrastructure such as charging points.
Each approach would give energy users a sense of greater justice in the UK tax system. Both would pave the way for a better future for all.
Home >Articles > Where's the justice in the UK tax system?
Where's the justice in the UK tax system?
With two new taxes introduced since September 2021 and two more up for debate, how does this all fit within the UK’s sense of fair play? And is it time for a windfall tax on excess energy profits?
In the UK, both policing and taxation are effectively consensual. Without this climate of consent, without this sense of fair play, law in general and tax law in particular would become unenforceable. In our representative democracy, there is no shortage of views on who should pay how much tax and on what. As we have noted previously, relatively few people seem to wish to pay more tax than they are required to by law, although mechanisms exist for them to do so if they wish. Meanwhile, many more people feel that others should pay extra tax, and the Treasury is currently busy deciding which new taxes should be introduced.
The health and social care levy was announced in September 2021. As taxes go, it was easy for HMRC to set up and collect as the identity of all the first-stage payers is known and, for the first year from 6 April 2022, it will take the form of a simple increase in the rate of NICs. From 6 April 2023, the levy will become a stand-alone tax payable by more people. Early opposition to the levy reflected concerns that it was excessively weighted against low-income groups. Now it has been established that the overwhelming majority of the levy will be paid by employers and high earners, it seems almost certain to come into force as intended.
The introduction of a new tax usually attracts considerable interest. Not so the public interest business protection tax which the government has introduced to reduce the number of gas and energy supplier businesses going into special measures. The Treasury has been particularly concerned that energy suppliers may realise valuable assets for their own and their shareholders’ benefit, precipitating the collapse of the business. With effect from 28 January 2022, if the value of the asset exceeds £100m then the new tax will be levied at the rate of 75% of the asset value. It is intended that this new tax will be in place for one year only, but it may be extended to 2025.
Proposals for a wealth tax have been much more contentious. These proposals took two forms. First, a one-off wealth tax to help meet the costs of the pandemic. Second, a periodic wealth tax to reduce inequality in the UK. Hand in hand with these were proposals to reform inheritance tax and replace it with a lifetime receipts tax, while also increasing the rates of capital gains tax. The chancellor is understood to be opposed to all these ideas.
That brings us to the most contentious proposal of all – for a windfall tax on the profits of companies which have benefited from excess prices charged in pandemic procurement contracts, and on the profits of North Sea oil and gas operating companies. While the former may escape additional taxes, the huge profits of the oil and gas companies reflect a hydrocarbon market in which the sellers are winners, while the buyers – individual consumers and businesses – must endure a cost-of-living crisis.
The prime minister himself is keen to rebut calls for a windfall tax on oil and gas profits, arguing that higher taxes would ‘clobber’ the investment in the North Sea which is necessary for energy security during the transition to net zero. To put it politely, that statement is at odds with reality. The published business plans of companies such as BP already fully factor in new North Sea investments. To the extent that company cashflows exceed their budgets, the excess goes to shareholders through dividends or share buybacks or is used to pay down corporate debt.
Faced with that inconvenient truth, the government seems only to have two reasonable courses of action:
- impose an outright windfall tax on the super-profits of the North Sea operating companies, using the proceeds to protect consumers and businesses from soaring energy prices; or
- introduce a windfall tax with deductions for genuinely new, additional expenditure on more renewables, green hydrogen production and clean-energy infrastructure such as charging points.
Each approach would give energy users a sense of greater justice in the UK tax system. Both would pave the way for a better future for all.
