Money: There are some old precedents to Labour's windfall tax proposals

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The Independent Online
Unless you've been on a desert island for the last year or so, you'll know that a windfall tax is in the offing - and that it's nothing to do with taking some of the apples that blow off your trees in the autumn.

Windfall taxes, essentially one-off levies on certain areas of the economy, arguably have a long and ancient history, though not necessarily a glorious one. So why are they so much in the news now - and will they affect you?

Back in early medieval times such levies were the main way that the sovereign raised money, usually through such devices as "fifteenths", which meant everyone had to contribute a fifteenth of their property to help fund the latest overseas investment drive (then known as a war).

With the development of more sophisticated forms of revenue raising such as customs duties, excise, stamp duties and that comparative newcomer - income taxes - one-off levies faded away.

In recent times there have been occasional returns to windfall taxes, the best known being a one-off tax on banking deposits in 1981 which raised about pounds 400m. Less noticed or acknowledged was a Supplementary Petroleum Duty which came in at the same time, hit the oil producers in the North Sea and raised about pounds 1bn - but perhaps that could be argued as simply an increase in the existing Petroleum Revenue Tax.

Now we have another of windfall tax on the horizon with a pledge from Labour that, if elected, they would introduce a windfall levy on privatised utilities alleged to have made windfall profits. The money raised would go towards new training schemes.

Full details of how the levy would operate are unclear, though more details are emerging from shadow chancellor Gordon Brown's recent speeches. The yield has been talked of as pounds 5bn, though this one-off levy may bring in less. But what remains opaque is exactly who is caught by the levy and how it will be computed.

In terms of who will be caught, the water and electricity industries are the generally accepted targets. But does that mean just the distribution companies? Does it extend to electricity generators? What about other parts of the ex-public sector - BT, BR, British Steel, British Coal etc? Pronouncements this week suggest that British Gas and BT are in the target area.

The method of calculation is very difficult. The banking levy in 1981 looked at the average amount of deposits held over a past period. That had the merit of being fixed, easily measured and not manipulable (in that the period was already past when the tax was announced).

But if the target of the impending windfall levy is excess profits how are these to be measured? Set a norm and look who made more - but that arguably penalises the more efficient companies. Attack excess distributions? But that means going back to see who got the money - no doubt not the current shareholders. Look at the profit levels now? But that doesn't really get at the alleged excess profits of the past.

All one can say is that there is something of a Damocletian sword hanging over a part of the economy. If the levy only raises pounds 1bn, many commentators have argued that could easily be absorbed by the likely recipients of the bills. But the amounts involved seem certain to be higher and may start to hurt. Then again, a Treasury report this week seemed to suggest that utilities had made good profits since privatisation - while at the same time pointing to the regulatory regime as arguably the control mechanism.

Overall, there is a climate of uncertainty. There is talk of challenges at European level, but Labour are certain that the EU would not interfere. So it looks as if a Labour victory would be followed by extra tax bills to many companies, but it seems highly unlikely there would be actual bills to shareholders.

Clearly your investments in Privatised Co may go down in value (or up if it turns out that the levy will not hit it as the market had anticipated). And in due course, I suppose, prices may go up, but that is another issue which the regulators will no doubt get involved in.

Then again, some are arguing that the Conservatives got there first with the recent introduction of a reduced rate of tax allowances (6 per cent as opposed to the normal 25 per cent) for long-term plant and machinery. This affects investors in big plant installations - which includes water and electricity companies. And the yield is going to be up to pounds 750m annually on Inland Revenue figures.

John Whiting is a tax partner at Price Waterhouse.

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