George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Is it time to let HMRC loose on the coronavirus profiteers?

Nobody likes a cheat, especially when cheating takes the form of profiteering during a time of global emergency. The Competition and Markets Authority (CMA) has received thousands of complaints about price gouging since the coronavirus pandemic began, with hand sanitisers and protective equipment at the top of the list. The list is long, with many people being forced to pay inflated prices for essential products as diverse as toilet rolls and flour. Unfortunately, the CMA isn’t able to do much about these complaints until it is given more powers by the Government. As those powers will relate to competition and consumer laws in the UK, the expectation is that they will not be forthcoming any time soon.

History, however, points to a great British success in using another weapon to tackle profiteering: tax. The UK was quick to introduce different forms of excess profits taxes during both the First World War and Second World War, with rates of up to 100 per cent. Described as 'the perfect tax for a short war' the excess profits tax made a valuable contribution to the UK Exchequer during both world wars.

These taxes, though designed like tanks for military use in time of war, have also been adapted to operate efficiently as tractors in peacetime. For example, in 1981 the Conservative government introduced a Budget levy on the profits of banks which were seen to be escaping the worst effects of the recession. In 1982, a special tax was imposed on North Sea oil and gas companies which were benefiting from high oil prices. Then in 1997, the Labour government introduced a windfall tax on the excess profits of utilities which had been privatised by the Conservatives.

What might a Coronavirus Excess Profits Tax look like? There are two front-running possibilities. First, a tax based on the capital value of the company. This is relatively complex and slow to quantify and collect. Second, a tax based on the increase in the net profits of the company. This could be worked out by comparing the average monthly profits for, say, three years up to 2019 with the actual monthly profits earned in 2020 and for so long as the pandemic continues. Some adjustments would be required, for example for R&D expenditure, but the general principle would be that monthly profits in excess of the three-year average for that month would be taxed at a higher rate. With the UK corporation tax rate currently 19 per cent and a notional allowance for R&D of say 5 per cent, following the wartime model excess profits might be taxed at 76 per cent. Corporation tax would continue to be paid in the normal way.

Subject to a de minimis exemption for small businesses, this would apply to UK businesses and to subsidiaries of multinational corporations. It would operate by self-assessment and so would be relatively easy for HMRC to police. If there had been no profiteering, no additional tax would be payable. Profiteers would however be required to pay the additional tax monthly or at such longer interval as Parliament might specify. As a further deterrent, HMRC could publish the names of all companies paying Coronavirus Excess Profits Tax and the amounts paid.

Of course, like its predecessors stretching back over a century, Coronavirus Excess Profits Tax would involve a measure of rough justice. But, like all good forms of justice, it would be quick and it would be seen to be done. By contrast, empowering the CMA to commence investigations and make decisions as to whether to institute formal proceedings against a limited number of businesses would be slow, resource-intensive and lacking certainty of outcome.

The same could be said of Prohibition-era USA, where federal law enforcers enjoyed only limited success against the notorious gangster Al Capone. However, the Internal Revenue Service secured an 11-year prison sentence for him on charges of tax evasion. Is it time to let HMRC loose on the coronavirus profiteers?

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