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Cost of Living: Why Rishi Sunak’s populist tax is facing backlash | Business Newsletter


The Prime Minister may declare that the ‘Temporary Energy Profit Tax’ is not a windfall tax, but, as is the popular saying, if it looks like a duck, wanders like a duck and waddling like a duck, it could be a duck.

The use of this particular term is an attempt to disguise that this levy – let’s call it what it is – represents a significant victory for the Labor Party and the Liberal Democrats. Both first introduced this policy and Rishi Sunak solved it.

The self-proclaimed ‘Low Tax Prime Minister’ has just imposed a combined tax on UK oil and gas profits to 65%.

Rishi Sunak goes beyond expectations – follow live cost of living updates

In doing so, Mr Sunak sought to confront critics on his own bench that low income taxes were ‘fantasy’ by highlighting similar measures in the past by Margaret Thatcher and George Osborne.

This is not necessary.

Mrs Thatcher’s personal income tax on banks in 1981 – imposed by her prime minister at the time, Sir Geoffrey Howe – was specifically imposed because banks benefited from government policy.

Sir Geoffrey raised interest rates – in those days this was done by the government and not the Bank of England – which would directly increase the profits of the lenders. Sir Geoffrey was offering with one hand and taking from the other.

Mr. Sunak is just taking. Furthermore, both Sir Geoffrey and Osborne have pledged to cut taxes for businesses. Mr. Sunak is about to raise taxes on businesses.

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Chancellor announces wind tax

The big question – and one that’s nearly impossible to answer – is the impact this will have on investment.

But the UK’s offshore oil and gas industry, which is already the UK’s most heavily taxed business sector, says there will certainly be an impact on investment and jobs.

Deirdre Michie, chief executive officer of industry body Offshore Energies, told Sky News: “Previous tax losses, we can show the data, that it does not undermine investment.

“And at a time when the country needs to really focus on energy supply security and energy transition, we’ve debated the stability and predictability of the fiscal regime, which is working. action, it is generating substantial returns for Treasurys, which they can then use to resolve the consumer crisis, but at the same time can give investors the confidence they need to keep investing invest in oil and gas and underpin the energy transition.”

Ms. Michie points out that the recent surge in profits comes after two years of significant losses in the sector – which supports 200,000 high-paying jobs – like it did during the previous downturn.

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Wind tax ‘doesn’t work’

She added: “There are shifts and rotations in this area, we know that, that’s why this change of government, the rules of the game are changed by the government. … could be a step backwards for the field.

“Historically, when this happens, it doesn’t work, it weakens investment, and over the last 10 years or so we’ve had the predictability and fiscal stability that has brought investment back into circulation. area.”

She said that, unless new investments are made now, oil and gas production in the North Sea will “fall off the cliff” by 2030.

Of particular interest to businesses is the particularly open nature of this collected tax.

Mr. Sunak said that if oil and gas prices return to “historically more normal levels”, the tax will be phased out. But the words “more historic than usual” are doing a lot there.

If the Prime Minister knew the “historically more normal” level of oil and gas prices, he certainly wouldn’t say. The only certainty is that the law will be scrapped by the end of December 2025 – so it’s likely that this tax will be in place, potentially hindering investment, over the next three and a half years.

Equally alarming, from a business standpoint, would be the Prime Minister’s revelation that he was considering “appropriate steps” to target “extraordinary profits” made by power generation companies.

His failure to elaborate on this point instead points to the complex nature of these businesses.

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What took this government so long?

As a matter of fact, the industry could argue that, due to hedging strategies, it does not enjoy spikes in profits under all circumstances.

The chart shows “spot” energy prices which can show a sharp increase in prices, but most power generators sell their output at a long-term price that will inevitably be lower than the “spot” price.

There may not be any profits for Mr. Sunak to tax. And determining the possible profits for taxation would likely require a horribly complicated process, in which manufacturing companies must open their books so that HM Revenue & Customs can determine it for themselves. the price they reach. That could take months.

The Prime Minister will argue that he is mitigating the impact of the wind tax by offering rather generous investment incentives with a new type of ‘super deduction’ relief.

The Treasury said: “The new Investment Allowance, which is similar to the super-deductible type of deduction, incentivizes companies to invest through saving 91p for every £1 they invest. This nearly doubles the reduction in reductions. existing taxes and means that the more the company invests, the less taxes they will have to pay.”

However, this may not be more incentive to invest than Mr. Sunak thinks. Major global oil companies with operations in the North Sea, such as France’s BP, Shell and Total, have a variety of investment projects to choose from around the world as they decide how to deploy their capital.

Mr Sunak, crudely, told these companies that, if they invested more in the UK, they would pay less tax.

But very few executives in any company, not just the oil and gas sector, want to be told by any government how to deploy their capital. Oil and gas companies may take the view that, even with these incentives in place, they could more lucratively invest their money elsewhere – especially given the cost of drilling and exploration in the North Sea relatively high and the risk of oil prices falling at some point. Future.

They may just assume that it would be easier to get a financial blow from Mr. Sunak in the short term.

And it could be even worse than that: The independent Institute for Fiscal Research indicates that investing £100 in the North Sea, with Mr Sunak’s new grant, would cost companies just £8.75. .

IFS economist Stuart Adam added: “A massively losing investment can still be profitable after tax. It’s hard to see why the government should provide such huge tax subsidies and thus encouraging even those projects that are not economically viable.”

Rather. This policy can lead to misallocation of resources and very inefficient capital.

What is important in today’s statement is what Mr. Sunak did not say. High energy prices are not only hurting households but also hurting businesses. However, as Mr. Sunak pivots on homosexuality giving billions of dollars to support households, there is nothing to support businesses – many of which are being pushed to the brink by high energy bills. than.

The Prime Minister’s supporters will argue, as they seek to defend this impersonation, that in the end only a handful of companies will pay. The Treasury Department said today that in recent years, fewer than 35 companies have paid the last round of taxes on the sector – the ‘additional charge’ introduced by Gordon Brown in 2002 and was raised by George Osborne in 2015 – and the top seven of these made 95% of the payments.

Look, they will argue, on the stock price reaction of BP and Shell – both of which saw their shares rise 1% this afternoon.

That, however, is not the place to look. These are global companies of which the North Sea is a very small part of their overall operations.

Instead, look at companies like Enquest, whose operations are focused on the North Sea and whose shares are down more than 8%, or peer Energean, which is down 2%. Or look at the power generation companies, it is still unclear how much they will have to pay, with SSE down 4% and Drax down almost 3%.

One last point worth remembering about today’s announcements.

Mr. Sunak’s gifts have the potential to boost inflation, as consulting firm Capital Economics notes: “The prime minister’s actions are adding to already high inflationary pressures. Other things equal. This easing of fiscal policy means reducing inflation to 2% target, monetary policy will need to be tighter.

“This supports our view that the Bank of England will have to raise interest rates from 1% now to 3% next year.”

However, what is a punitive tax on a strategically important industry and a potentially inflationary giveaway, when set against the parties during a front-page lockdown?

Quack!



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