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The tricky question of tax fairness

Given the backdrop of unsettling news on rocketing energy prices, teetering property giants and tapering, perhaps investors were feeling unusually sensitive to the healing and uplifting power of music when they drove the value of Universal Music, the world’s largest record label, to a 34 per cent premium on its market debut this week. Of course, it’s likely they also agreed with the JP Morgan Cazenove analyst who described Universal Music as a unique “must-own asset”.

But however soothing music can be, it will take more than an upbeat tune to quell the annoyance felt by some Scottish Mortgage Trust (SMT) shareholders over claims that the investment trust has “cashed in on Covid” and should be forced to pay a windfall tax on its “excess pandemic profits”.

That’s the argument put forward in a paper by Tax Justice UK, an organisation that campaigns for fairer tax. It has named six companies that it says have cashed in during Covid, and top of the list is the hugely popular and unique-in-its-own-way investment trust. The campaign group argues that SMT has made pandemic profits of more than £8bn – a pandemic-powered increase of 801 per cent. The other guilty parties are Asos (ASC), Tritax Big Box (BBOX), Serco (SRP), AstraZeneca (AZN) and Rio Tinto (RIO) and Tax Justice highlights two other trusts that have made oversized profits during the  pandemic: RIT Capital Partners (with an "excess" of £718m) and Edinburgh WorldWide (EWI) (excess of £332m). 

Tax Justice UK is only asking for a 10 per cent corporation tax surcharge on the companies’ global profits that exceed pre-pandemic levels, although it highlights in its report that a windfall tax of 50 per cent would raise far more money from the six (up to £8bn), and its partner organisation Tax Justice Network has called for a 100 per cent levy on windfall pandemic profits.

There is no question that SMT has delivered bumper returns over the period. But these are thanks to its Tesla and tech holdings, skillful stock picking and long-term backing of growth companies from their early stages. There is far more hard work and perseverance in those returns than opportunistic switching or the pure luck of being in the right place at the right time.

It may be that arguing that some profits are virtuous, or deserved, rather than opportunistic is mere quibbling. The point Tax Justice wants to make is that the six companies have made “excess” profits totalling £16bn while the pandemic has imposed enormous hardship across the UK on women, minority ethnic households, low-income households, young people and many businesses. That’s why those who prospered should be asked to share their profits.

Windfall taxes, says Tax Justice, ensure that “no one benefits outrageously from a situation in which the masses suffered”. Tax Justice is also irked by the fact that investors “who have benefited from surging stock prices during the pandemic” only pay 20 per cent tax on their capital gains.

Quibble or not though, and however strong the case for a windfall tax on profits demonstrably linked to the pandemic, the danger of plundering profits in this way is that of ultimately creating disincentives to take risks and to have goals.

And gains aren’t always realised, profitable years can swiftly be followed by lean(er) ones, which is a clear post pandemic risk for two DIY specialists in our results pages as people returning to normal or hybrid life stop making their homes nicer. And having stashes of cash to reinvest in new drugs is vital for pharma companies. 

Thanks to all the readers who wrote in with their views on where the tax burden could and should fall. I plan to round these up and report back.