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UK Windfall Taxes—It’s a Matter of Politics

May 25, 2022, 7:00 AM

Governments have a history of using popular sentiment as a way of raising taxes—for example, UK individuals are currently paying a National Insurance levy to support the National Health Service. As higher tax rates are generally unpopular, a “good cause” can make the tax medicine easier to swallow.

Windfall taxes are retrospective taxation. Tax rates are not normally decided after the event, but sometimes the circumstances mean that the political environment makes it acceptable.

Companies do not have votes, so they are often easier to deal with, unless there is an obvious and short-term impact on employment or economic growth. Outside of wartime, companies that are considered to have made excess profits through good fortune, unpopular, or unacceptable businesses practices, or from a monopolistic activity, have found themselves in the firing line.

The levy currently being proposed in the UK on developers to deal with the cladding scandal is a windfall tax by another name. It is argued that the building trade made considerable profits from government support through the help-to-buy scheme and therefore should pay an additional tax to recompense for inappropriate practices within the industry. The rights and wrongs of this argument are beyond the scope of this article—it is, however, meant as a summary of the basic positioning that makes additional taxation politically acceptable.

As Woodrow Wilson said in 1918, “The profiteering that cannot be got at by the restraints of conscience and love of country can be got at by taxation.” Profiteering is clearly in the eye of the beholder, but successful, lucky or ill-behaved companies are always fair game.

Energy Crisis

The UK energy price crisis has caused a renewed focus on the energy majors, and there are calls for a windfall tax. The government is trying to steer a neutral path, ruling nothing in or out—although at the time of writing the political pressure is growing.

The government recognizes that its climate change agenda could be affected if major energy companies are made to feel that investment will be penalized. After all, at the beginning of the Covid-19 crisis, demand for certain fuels was so low that certain hydrocarbon prices were negative and considerable losses generated.

Politics drives whether a windfall tax is tenable. However, the past provides some interesting lessons about how it could be constructed.

There are recent precedents: for example, bankers’ bonuses were taxed after the financial crisis of 2008. Bonuses over £25,000 ($31,000) were taxed at 50%, with the additional tax paid by the employer rather than the employee. The tax didn’t raise that much money, because it was designed to put banks off paying bonuses, rather than collect revenue from them.

What Can We Learn From the Past?

The granddaddy of all UK windfall taxes was the Excess Profits Tax introduced in World War I. The government felt that some industries were doing excessively well out of the war and introduced a tax of 50% of profits above the “normal” level. The rate rose to 80% in 1917, and was finally abolished in 1921. It met the key tests—it was collected from those who made abnormal profits, it ended, and it was used to support the war effort. Interestingly, reports say its administration was quite smooth—businesses saw it as their patriotic duty to pay it. It proved a popular approach as Australia, Canada, New Zealand, South Africa, France, Italy, and the US all introduced similar taxes.

The key to the tax was a definition of “normality,” and it was essentially an average of pre-war profits—an approach that has been used in various iterations of war taxes by different countries at different times. There are all sorts of views about what constitutes a good measure of “normal,” but given that war taxes are raised in times of national crisis, the pragmatic reality is that taxes need to be raised and many of the calculations are designed to do so in the most logical way possible.

Hidden Excess Profits Taxes

It is worth remembering that many regulated businesses have a de facto excess profits tax, although it is achieved by regulating the level of profits rather than raising a tax. For many public good businesses, such as utilities, it is much more politically acceptable to regulate the acceptable level of profits upfront. Having to raise additional taxes on unacceptable profits after the event is more problematic. Dealing with the problem in advance is much more common than fixing it after the event.

Typically, this is achieved by identifying a regulated asset base in advance—placing a value on it and allowing a regulator to determine what an acceptable level of return is on that level of investment, as well as allowing for upgrades, additional investment, expected service levels, cost of financing, and often a near monopolistic market position. This also causes a lot less fuss than trying to raise a tax retrospectively.

Therefore, we can see that a windfall tax needs to be carefully constructed with clear goals in mind, should impact only those it is designed to collect from, have a clear sunset clause (otherwise it is just a tax—remember income tax was only a temporary measure) and have an obvious use. Tipping the cash into the general taxation pot takes away some of the justification behind the reasoning.

If it is in place to “punish” an industry for its good fortune, it also helps if politicians can generate publicity from it.

Is Averaging the Best Method?

Windfall taxes are popular if appropriately introduced, especially if they are designed to deal with some form of perceived inequality or exploitation.

One of the key challenges is around the definition of what should be taxed by the excess profits. A simple averaging of earlier period profits may not have the desired effected—for example, what happens if there have been loss-making years? Speak to owners of any business and no one would ever suggest there is any such thing as a “normal” year.

Business is a fast-moving roller coaster. The most recent business cliché is to talk about dealing with the “new normal,” so it is difficult to see how comparing with the past has any logical application. Is a historic average really the best way to reflect the current profit-making environment? Profits have been quite volatile in most industries in recent years.

Get the definition wrong and the government could collect the “wrong” amount of tax—too little to do what it needs, or too much and damage the future investment that will create growth.

Is a regulated asset base any better? Businesses with regulated assets often have a value for those assets—not necessarily the same as that disclosed in the financial statements. A regulator or tax authority could set the appropriate rate of return on those assets; anything over that rate of return being a windfall and subject to tax. The challenges are obvious for businesses that are currently outside such a regime. What value do you take? Who decides it? How do you deal with an inflationary environment?

Financing structures in times of rising interest rates may imply a higher rate of return is required just to cover basic costs. The costs of collecting and administering a tax should not be excessive (especially if it really is a one-off).

Occam’s Razor always suggests that simpler is better than complex. Windfall taxes are produced in a hurry, they need to be easy to understand and explain to the nation. Averaging is easy.


Many of the targets of windfall taxes are complex international businesses. How should overseas assets and profits be treated? Is the windfall tax just on UK activities or on worldwide activities? Expect transfer pricing professionals to have a field day in helping determine where the profits have arisen.

Historically, it has always been easier to raise windfall taxes on territorial profits because some profits will already have been taxed overseas. The rise of digital businesses has caused the Organisation for Economic Cooperation and Development to bring forward proposals about minimum tax rates and taxing sales where they are made, which could be seen as a form of windfall tax in as much as the tax system had previously been unable to tax some of these profits in an equitable way.

Some overseas tax authorities may want to impose their own windfall tax, which could lead to a double taxation of windfalls? Presumably, if a UK tax on worldwide profits were introduced, there would need to be some sort of credit for windfalls already taxed overseas. It has to be easier to restrict the windfall tax to in-territory profits. What will be the impact on investors?

There is an argument that future investment be impacted by random taxes levied after the event—why would businesses invest in new products and ideas if there is a risk of increased taxes on successful outcomes? The potential targets of such taxes have already been setting out their position, and why it would be inequitable or damaging to the longer-term policy objectives of the government. Expect to hear more as the PR war is ramped up by politicians and corporations.

A riskier regulatory, political, and tax environment would require higher returns if investment were to go ahead. In turn, this may mean that new investment opportunities get rejected, or redirected to more friendly jurisdictions. Expect to see a lot of preparatory work done by politicians to manage investor fallout.

It would be surprising if considerable emphasis were not placed on the tax-friendly nature of the investment environment, to remind businesses that the risks of retrospective taxation are only part of the calculation of doing business. The UK Chancellor hinted in a recent speech to the Confederation of British Industry that tax cuts would be available for those who “invest more, train more, and innovate more.”


When the political winds blow in the right direction, windfall taxes can be popular and even acceptable to the payers. It provides some red meat to the electorate and makes governments feel like they have done something.

For temporary taxes, simplicity is the key—the costs of administration must be low and costs of compliance proportionate and based on pre-existing information.

The long-term consequences are harder to deal with. If the tax is seen to be random or capricious it may result in a repricing of investment opportunities. However, politicians rarely worry about the long term, that’s someone else’s problem.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

Author Information

Laurence Field is a Partner, Corporate Tax, with Crowe UK.

The author may be contacted at: