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Long-term questions should be looming larger

If a week is a long time in politics, a month is a lifetime. In our feature on windfall taxes at the end of April, we said that Rishi Sunak’s resolute opposition to the idea could dissolve by the time of the October Budget. As of the time of writing, it looks likely that the chancellor will cede the ground in a matter of weeks or even sooner.

The scope of the tax has been the big discussion point this week. The Financial Times reported on Monday that power generators could now be hit, too. That was enough to take 10 per cent off the share prices of utilities Centrica and SSE, and half as much again off power station owner Drax. Renewable infrastructure investment trusts also fell by between 3 and 5 per cent.

Precise details are, of course, still lacking – although the FT suggests Treasury officials are basing their work on the changes introduced by George Osborne in 2011, when he raised the “supplementary charge” on oil and gas producers from 20 per cent to 32 per cent.

Some suspect the impact will be limited: analyst Iain Scouller at Stifel thinks the effect on the renewables trusts would be “a lot less” than the corporation tax rise from 19 to 25 per cent that is already scheduled for next April. His assumptions are that the windfall rate for renewables would be no more than 21 per cent (on top of corporation tax) and that it would last for two years at most. Admittedly, the second point is contestable: last time round Osborne linked a reduction in the levy to the oil price falling below $75, which did not happen for more than three years.

But there is a bigger issue here, whichever companies the Treasury might target. Opponents of such taxes regularly point to the deleterious effect they might have on corporate investment. With this in mind, 2011’s new marginal rate was lower for new projects than old, and a few months later the government made further concessions for new North Sea investments. At a time when domestic energy supply is deeply uncertain, Sunak can be expected to follow suit – even if his recent ultimatum for producers to invest more in order to avoid windfall charges now looks misguided in light of the apparent change of heart.

The chancellor knows that such investment is a priority not just in the oil and gas sector. His super-deduction tax cut introduced in 2020 was supposed to give a much-needed boost to capital spending in the UK, which lags G7 peers. As the IC’s Alex Newman noted on our Companies and Markets podcast last week, BT (as well as domestic rivals such as Virgin Media) has been a particular beneficiary of this allowance – as have the customers to whom it has brought fast broadband earlier than scheduled. But there is little sign it’s had the desired cumulative effect: the Office for National Statistics said earlier this month that UK business investment fell by 0.5 per cent in the first quarter of 2022.

That position could get worse still if, as the Confederation of British Industry claims, investment will fall off further once the scheme ends in 2023. The Treasury is now said to be canvassing views on a potential replacement. It will attract fewer headlines, but the fate of this policy will likely have longer-term consequences for the economy than any windfall taxes.

Private investors, of course, have their own issues to deal with. On the subject of long-term time horizons, our Sipps special this week provides all you need to know about the retirement savings wrappers. We cover everything from asset allocation to costs and charges. Find all our Sipps special content here.