After BP’s big results announcement today, it’s clear that major questions remain about Rishi Sunak’s windfall tax. The oil giant registered profits of $8.2bn (£7.1bn) over the past three months, almost triple the profit it made for the same period last year. While BP reports it expects to pay about £700m in windfall tax on its North Sea operations this year, it also plans to spend more than three times that much on a $2.5bn (£2.17bn) share buyback programme, handing surplus cash back to its shareholders instead of using it for renewable investment or lowering prices.
Sunak introduced the tax when he was chancellor, promising to redistribute the extraordinary profits of oil and gas companies to households and businesses in the form of cost of living support. Thanks to extremely generous loopholes – which provide tax breaks in return for investments, such as drilling oil in the North Sea – the energy profits levy looks set to miss out on vital revenues. Shell has made more than $30bn (£26bn) in net income since the start of the year, and still hasn’t paid a single penny in additional tax from the levy in the UK.
As prime minister, Sunak is once again looking at ways to raise tax revenues for the government. Rather than return to the public service cuts of the austerity era, he may turn his focus back to the behaviour of the companies he first targeted in May.
Companies producing oil and gas have been making eye-watering profits this year while average energy bills have doubled since last October, even with the government’s energy price cap holding down costs. This is no coincidence: their windfall profits are the result of sharp increases in the wholesale price of energy and represent direct cash transfers from the pockets of households and businesses.
But instead of channelling all of their profits into productive investments, energy companies have transferred most of their extra cash straight to shareholders in the form of dividends and “buybacks”. Dividends are the primary means of paying shareholders when the company makes a profit, while buybacks reward shareholders by inflating the value of a company’s stock. Share buybacks were illegal in the UK until 1981 because they were considered by many to be a form of market manipulation.
Despite aiming to invest billions in the UK’s “energy system” by 2030, Shell and BP have transferred more than $28.6bn to shareholders through buybacks this year. The prediction by BP’s chief executive last year that rising oil prices would turn the company into a “cash machine” for its investors was proven right again this morning when it announced the latest round of buybacks. As IPPR and Common Wealth recently showed, in the first half of this year BP spent 10 times as much on transferring cash to shareholders through buybacks as it invested into renewable energy. Shell spent seven times as much on buying back its own shares as it invested into renewables in the same period.
Oil and gas giants are among the most extreme examples of this practice, but they aren’t anomalies. Cash transfers to shareholders have increased across the UK economy since the pandemic ended. Shareholder payouts, which slumped to record lows during Covid, are now 30% higher than they were pre-pandemic. Buybacks have rebounded 20-fold since their lowest point during the pandemic and are now twice as high as their previous peak in 2018.
Astonishingly, shareholders pay less tax on the wealth they earn from owning stocks than working people do on their wages and salaries. Dividends and buybacks are taxed at consistently lower rates than income tax, allowing asset owners to accumulate wealth while paying less tax than workers.
These payouts overwhelmingly benefit the wealthiest members of society. Recent analysis by Common Wealth shows that the top 1% of households overwhelmingly dominate the direct ownership of UK shares. This means that while households struggle with the cost of living crisis, profits are being channelled into the hands of wealthy asset-owners. This situation is unjustifiable. Taxes on shareholder payouts should be raised to ensure that companies are not channelling profits to their investors at a time of national economic crisis.
The Biden administration recently introduced a small tax on share buybacks to fund renewable energy projects and reduce the US government’s deficit. Analysis by IPPR and Common Wealth shows that if the UK government followed suit, it could raise £225m a year. Alternatively, a “windfall” tax on share buybacks could raise up to £11bn in a year, more than half coming from the buybacks of Shell and BP alone. A higher tax would also encourage companies to reinvest their profits into the economy and in the process boost growth, innovation and job creation.
At the same time, the government could close the loopholes that allow shareholders to pay less tax than workers. Bringing taxes on dividends in line with income tax levels would raise £6bn a year.
Targeting the imbalance between growing shareholder payouts and falling household income would allow the government to continue supporting households and businesses without returning to austerity. It’s vital that we prioritise these progressive revenue-raisers over the failed spending cuts of the past.
Joseph Evans is a researcher at IPPR
• This article was amended on 1 November 2022, as it was originally attributed to George Dibb, not Joseph Evans.
