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  • Excess Profits Tax: Nothing new under the sun

    8 February 2021

    Excess Profits Tax: Introduction

    In any crisis, there are winners and losers.

    The same is clear when one considers the financial impact of COVID-19. Whilst many businesses have had to pull down the shutters – literally and / or metaphorically – others have prospered. 

    Whether we are talking about Supermarkets – who have been allowed to open to sell essential items and greetings cards – or online retail giants such as Amazon, some businesses have found themselves benefitting greatly from a surge in sales.

    In this context, the battle cry for a windfall tax or Excess Profits Tax on these businesses is perhaps to be expected.

    Yet, as with most aspects of life, in tax there is nothing new under the sun.

    But how have these taxes operated in the past?

    The Great War

    In a 1920 article for the American Economic Association, US academic Robert Murray Haig reviewed the UK’s Excess Profit Tax. 

    But, I hear you ask, what is the relevance of work conducted by a US scholar, reviewing the ‘success’ or otherwise of the UK’s version of the tax from the other side of the Atlantic over a century ago:

    In the preamble, Haig states:

    “The only invention of consequence developed during the war in the field of finance is the special taxation of excess profits. This innovation has proved itself to be a remarkably effective device for producing large revenues and has achieved a degree of popularity with the public generally…”

    That final sentence is instructive and perhaps explain why talks of a COVID related ‘Excess Profit Tax’ (“EPT”) or ‘Windfall tax’ have gathered pace almost since the start of the pandemic. 

    Clearly, anything that might produce the magic combination of ‘large revenues’ and achieve a ‘degree of popularity’ is likely to prick the ears of the Treasury.

    The UK had been the first nation to introduce the tax during WWI and, by the time of Haig’s study, it had been in operation for 5 years. 

    Originally, the rate was 50%. However, at its peak, the EPT was levied at a rate of 80% of ‘excess profits’. In simple terms, ‘excess profits’ were those that exceeded a pre-war ‘standard’ (perhaps read ‘average’).

    It raised enormous sums. In both years 1918-19 and 1919-20, the EPT raised £289m per annum. This was more than the aggregate of ALL other taxes collected in the year from other sources. Of course, these funds were used to feed the voraciously appetited First World War machine.

    The EPT was honourably discharged in 1921.

    The context behind Haig’s article was that the US was contemplating the repeal of its own version of the tax which it had introduced when it joined the war in 1917. Indeed, US president Woodrow Wilson had famously stated that “profiteering that cannot be got at by the restraints of conscience and love of country can be got at by taxation.”

    The EPT seemed successful in that mission.


    The Great War was supposedly the war to end all wars. 

    However, barely two decades had passed before the world was once again in mortal conflict – and the UK was soon conscripting the EPT once more. 

    Following on from the War Budget on 27 September, new provisions were introduced as follows:

     “where the profits of any trade or business… as falls [in any accounting period after 1939] exceed a certain standard, there shall be charged on the excess a tax of [60%]

    In 1941, Chancellor, Kingsley Wood set out exactly the motives behind the EPT:

    “[it] is directed primarily to taking the profit out of war and ensuring that in war-time, when the whole nation has to bear sacrifices, the increased production which the war requires will not become the means of enrichment that it did in the last war.”

    Utilities, oil and banker’s bonuses

    But EPTs are not only a war time device. More recently we have seen tax charges levied on circumstantial ‘enrichment’. However, these have been called ‘Windfall taxes’.

    Both Margaret Thatcher and Gordon Brown borrowed the tactics from their war waging predecessors at different times when the fiscal cupboard had been found bare.

    The Iron Lady introduced a levy of 2.5% which was applied to the non-interest-bearing deposits of the banks. This collected around £400m from the banks – who had largely escaped the consequences of a deep recession. The following year, there was special tax applied to the oil and gas industry which raised a much chunkier £2.4bn.

    New Labour also showed it was prepared to use windfall taxes when it introduced one that applied to the ‘excessive profits’ of privatised utility companies. The value of these companies was calculated by multiplying their (average) profit figure by 9 and then deducting the value of the company at privatisation. The balance was subject to a 23% skim.

    There were strong calls in 2008 for a windfall tax on energy companies, which ultimately fell on deaf ears.

    In 2010, Labour Chancellor Alistair Darling introduced a tax on banker’s bonuses. This levied a 50% charge on any individual bonus over £25k and was payable by the bank.

    It was originally envisaged that this might raise around £500m. However, during the four months that it was in place, it raised a whopping £3.4bn.

    Time for a COVID-19 EPT?

    It is easy to see why parallels are being drawn between historic EPT’s implemented to deal with the financing of world wars and the international fight against COVID-19.

    It is very easy to come to the same view as Woodrow Wilson that, although there are many losers, there are also businesses that have benefited significantly from the pandemic and mainly as a result of perilous circumstances.

    However, it is not that simple. 

    For instance, a number of UK supermarket chains, which have remained open for the entirety of UK lockdowns, are one type of business that has been accused of “COVID profiteering”. 

    It is clear that their revenues have been much higher, but some of the supermarkets have pointed to increased costs – whether as a result of making stores COVID safe or because they have had to employ more staff.

    This should not be an issue if any COVID EPT is drawn on similar battle lines as its war time antecedents. This is because it would be based on profit – meaning that increased costs would be taken into account – and that only profits that exceeded a pre-COVID standard would suffer EPT. 

    Of course, other ‘non-excess’ profits would be subject to tax at the usual corporation tax rates. 

    Such a tax, if felt desirable, could be implemented effectively for traditional businesses – such as supermarkets. However, the difficulties would come from online businesses.

    Clearly, there are already problems in obtaining what the man or woman on the street might see as these company’s fair share. We have seen the Diverted Profit Tax – and, more recently, the Digital Sales Tax (“DST”) – introduced to counter this – albeit it seems to be the case that the DST only captures Amazon’s profits from Third Party sellers, rather than its own sales. It appears that there is a new ‘online sales tax’ under development which aims to level the playing field between traditional stores and their online counterparts. 

    Like the DST, it would appear that the online sales tax would apply to revenues rather than profits. As such, it would seem sensible that a COVID EPT would need to lock in to online sales as well as the profits of traditional businesses.

    Further, any tax would need to be retrospective to maximise the tax take – otherwise, there might be a change in behaviour or, quite simply, the excessive profits may have disappeared!

    What about changes in behaviour? A short EPT ‘period’ would undoubtably distort behaviour. Company’s might look to reinvest profits back into the business for R&D purposes or other capital expenditure. They may invest in their workforce. The aim being that the benefits of such investment are only returned once the EPT period has ended and the levy avoided.

    Without being addressed, these could limit the scope of the tax. However, it might be considered that none of these behavioural changes are actually undesirable?


    The key point is what would this tax raise? 

    During WWI, there were two years where the receipts from EPT was more than the total contribution from other taxes in the same year. 

    However, it seems unlikely that the same could be raised from an EPT. The current receipts from corporation tax are around £55bn (2018/19). Even if one took in to account the profits of businesses outside of corporation tax – partnerships / LLPs – and any revenues from the recent DST, then it seems that that such a tax would struggle to do any heavy lifting. 

    It seems more likely that an ‘across the board’ rise in corporation tax and income tax is much more likely here.

    However, such calculations are well above my own pay grade!

    In 1915, a milling company called Spillers & Bakers apologised to the nation for having made profits of £300k for the year. This was a six-fold increase in profits from the previous year despite (because?) of the onset of war.

    Although some firms have now returned COVID support – including business rates relief and furlough payments – I cannot see Jeff Bezos similarly prostrating himself at the feet of his Amazon Prime subscribers and coughing up funds under an EPT any time soon!

    If you have any queries about this article, or tax matters in general, then please get in touch.