Sunak’s design for the windfall tax is complex, but is it any good?

Show caption Shadow chancellor Rachel Reeves responding to Rishi Sunak’s statement in the House of Commons. Photograph: UK Parliament/Jessica Taylor/PA Nils Pratley on finance Sunak’s design for the windfall tax is complex, but is it any good? Nils Pratley Labour is right to crow as the chancellor’s hand is finally forced, but we need to see what materialises Thu 26 May 2022 19.52 BST Share on Facebook

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Labour’s front bench is entitled to crow. Rachel Reeves and Ed Miliband have been banging on about the need for – and fairness of – a windfall tax on North Sea oil and producers since January. Since then, Rishi Sunak has stumbled from outright hostility to, now, a full U-turn. The fact the chancellor couldn’t bring himself to utter the word “windfall”, and instead labelled his scheme an “energy profits levy”, only adds to the political sport.

But here’s the thing: Treasury wonks have come up with a very different design for Sunak’s levy. Is the government version better? Well, it aims to raise more money, which is an important difference. We wait to see how much of the Treasury’s “around £5bn” materialises over the next year, but the figure is at least twice as large as any mentioned by Labour, which had merely suggested an extra 10% surcharge.

Sunak has opted for 25% – and, critically, his levy could run until the end of 2025 if oil and gas prices stay high. That multi-year element is crucial, and took the industry by surprise. BP said it would review its North Sea investment. Understandably so: the chancellor has also fiddled with investment allowances – the sweetener for firms within the levy – but this element is not straightforward.

Tax reliefs at 80% on capital spending look superficially generous for oil and gas producers that keep drilling, but the effect of temporary allowances on projects that can take a decade to deliver is hard to decipher. Sunak will have a design triumph on his hands if companies end up investing more, while also paying more tax, but it is impossible at this stage to say that outcome is guaranteed. The reaction in coming days will tell us more.

Meanwhile, the electricity generators are still in the dark. Drax (biomass), SSE (windfarms and hydro) and Centrica (nuclear exposure on top of its North Sea gas fields) saw their shares fall as Sunak said he would “urgently evaluate” the size of their profits and consider “appropriate steps”. Translation: the Treasury started its work too late.

The case for a windfall tax has been overwhelming in recent months as Ofgem’s price cap heads towards £2,800. Even oil executives have privately come round to conceding the inevitability. But the detail of the design was always the vital bit. Sunak has opted for a complicated carrot-and-stick formula – and complexity, as we’ve seen with budgets in the past, is not always a virtue.

With BT, size clearly matters

What took so long? The National Security and Investment Act has been on statute books since January, just waiting for a suitable case for intervention by government to come along. Now the business secretary, Kwasi Kwarteng, has found two possibilities in two days – and both have been on open display for months.

One is Newport Wafer Fab, where the issue is last year’s Chinese-backed purchase of a south Wales maker of silicon wafers. We’ll return to that one another day. The more important “call-in” is BT, or specifically French telecoms billionaire Patrick Drahi’s 18% stake, which was upped from 12% last December. Kwarteng has got in just in time: Drahi’s non-bid pledges expire in mid-June.

The security act could almost have been written with BT in mind. The telecoms company is knee-deep in government work with a cyber and intelligence angle. And a would-be champion in fast-fibre broadband is plainly embedded in the nation’s infrastructure for the digital age. So, yes, getting clarity on who is allowed to own BT, or what size of shareholding is tolerable, matters.

Kwarteng should definitely make clear to Drahi that a takeover of BT is out of the question. The billionaire has built and run his international telecoms ventures with heavy helpings of debt, which is exactly what BT does not need at this moment. After years of regulatory prodding, the UK is finally spending £15bn on rolling out fibre; let it get on with job without the risks that come with financial engineering.

The UK’s security services, presumably, will also have a view: one suspects they find UK quoted-company status for BT, with accountable UK-style governance, a satisfactory state of affairs. Even if Drahi could offer assurances about cooperation, the problem with a change of control is that you never know who the next owner will be. Deal makers like Drahi tend to want an exit eventually.

If Kwarteng shares the view that a takeover is off-limits, his next question is what to do about the “creeping control” risk. That’s trickier. But an 18% stake – and no more – would be one reasonable answer.