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The Windfall Tax was a tax on what were claimed to be "the excess profits of the privatised utilities" [1], introduced by the Labour government in 1997. It followed from their manifesto commitment made during the 1997 general election campaign to impose a "windfall levy" on the privatised utilities. [2] The tax came after 18 years of Conservative government, which had seen the privatization of many state-owned assets, at prices which many considered too low. It aimed to "put right the bad deal which customers and taxpayers got from the privatisation of the utilities". [3] The tax produced an estimated one off income to the government of £5 billion, which was used to fund the New Deal, a welfare-to-work program that sought to tackle long term unemployment, as well as providing capital investment for schools and the University for Industry (Learndirect).
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The tax was calculated by means of a 9 times P/E ratio, whereby the average post-tax profit in the four years after privatization was multiplied by 9 to give the value for the purposes of the tax. The difference between this value and the total market capitalization based on the company's flotation price was subject to a 23% 'windfall tax'. The tax was charged to the company, and was payable in two instalments on 1 December 1997 and 1 December 1998.
The companies affected were those privatized by the Telecommunications Act 1984, the Airports Act 1986, the Gas Act 1986, the Water Act 1989, the Electricity Act 1989 (and the Electricity (Northern Ireland) Order 1992) and the Railways Act 1993. The firms affected were BAA, British Energy, British Gas (now BG plc and Centrica), British Telecom, National Power, Northern Ireland Electricity, Powergen, Scottish Hydro, Scottish Power and Railtrack, the regional electricity companies and the privatized water and sewerage companies (including such companies now forming part of Hyder, United Utilities and Scottish Power).
Since 1997, no further windfall taxes have been levied in the UK. However, calls have been made for new windfall taxes. The Financial Times reported in January 2008 that the government was considering ways of maximising returns to the treasury from the sale of the troubled Northern Rock bank, which could include a windfall tax or the government taking an equity stake. [4] In the event, the bank was not sold on to private investors, but instead came under UK government ownership.
Calls have also been made for a windfall tax on energy companies.[5][6] Notable supporters of these calls have included the Guardian columnist Polly Toynbee[7] and the left wing pressure group Compass. The latter's windfall tax campaign has attracted the support of over 120 (correct of 6 September 2008) MPs.[8] Some media reports have suggested that the government is interested in levying such a windfall tax,[9] while others have suggested that government ministers are opposed to the idea.[10] The BBC reported on 3 September 2008 that such a windfall tax was "still an option".[11]
Alternatively, members of parliament proposed to levy a tax specifically on the profits that energy firms had made through the EU carbon emissions trading scheme.[12]