Over the past year, with a range of increases to taxes, mortgages, energy bills and the general cost of living, discussions surrounding a concept known as a windfall tax has intensified to help make up shortfalls and reduce the burden of extraordinary circumstances on ordinary people.
A windfall tax is not one that many people outside of direct beneficiaries will need to see a tax accountant to sort out and is typically only ever proposed in somewhat unexpected circumstances where all but a few people suffer particularly serious consequences, often known as a Black Swan Event.
With many different calls and proposals for windfall taxes, here is a brief explanation of what one is and examples of windfall taxes executed in the past.
Windfalls
A windfall gain is simply an unexpected acquisition of income, such as winning the lottery, finding a mysterious treasure or benefiting more than expected from an inheritance.
In the world of business, windfalls typically come from unexpected market conditions that lead to businesses becoming unexpectedly profitable.
A small example of this would be how lockdowns led to many entertainment companies, especially computer game developers, recording significantly higher profits as their products were bought by a wider group of people than usual in ways that increased profit margins.
However, windfalls typically occur when a major national or international event increases the value of an asset, either by increasing demand, reducing supply or both.
A good example of this is the 1970s oil crisis when an embargo by OAPEC led by Saudi Arabia led to the price of oil increased by 300 per cent in less than six months.
Taxing Windfalls
A windfall tax, therefore, is a typically one-off tax rate applied in unexpected situations, often with the intent of funding support packages for people affected worst by these scenarios.
An example of a windfall tax came in May 2022, which would have taxed the profits of energy companies to help mitigate the effects of a cost of living crisis.
The biggest UK windfall tax was the two-part 23 per cent windfall tax on utility companies that had benefited from privatisation at prices significantly below market rate.
These included BT, British Gas/Centrica, Powergen (Now E.On), Railtrack and United Utilities and many other companies that had made a lot of money from being removed from state ownership.
It ultimately was used to fund a programme known as the Flexible New Deal aimed to help the long-term unemployed find work, as well as allow for investment in schools.
A similar windfall tax was proposed when the government bailed out the struggling bank Northern Rock were it to be sold to private investors. This ultimately proved irrelevant as the UK government owned Northern Rock for several years before selling it to Virgin Money in 2012.
Several further windfall tax proposals were made, typically in response to energy price increases and considerable profits by energy companies.
The highest-ever windfall tax in the world was implemented in Mongolia in 2006 on the profits of any mining company operating in the region, although it was repealed three years later.