Inland Revenue 1 2 July 1997 WINDFALL TAX The Chancellor today announced the introduction of the proposed windfall tax on the excess profits of the privatised utilities. The one-off tax will apply to companies privatised by flotation and regulated by statute. The tax will be charged at a rate of 23 per cent on the difference between company value, calculated by reference to profits over a period of up to four years following privatisation, and the value placed on the company at the time of flotation. The expected yield is around 5.2 billion Pounds. DETAILS Companies affected 1.The tax will apply to companies privatised by flotation and regulated (or with a subsidiary regulated) by relevant privatising statutes. These are the Telecommunications Act 1984, the Airports Act 1986, the Gas Act 1986, the Water Act 1989, the Electricity Act 1989 (and the Electricity (Northern Ireland) Order 1992) and the Railways Act 1993. The tax will be charged on the floated companies. How the tax is calculated 2.The taxable amount will be the difference between company value, calculated by reference to average annual profits over a period of up to four years following privatisation, and the value placed on the company at the time of flotation. 3.Company value will be calculated by multiplying average annual profits after tax over the period by a price/earnings ratio of 9. The value placed on the company at the time of flotation will be calculated by multiplying the ordinary share capital of the company at flotation by the price at which shares were offered to the financial institutions at flotation. 4.Profits after tax figures will be derived from accounts drawn up under the rules set out in the Companies Act 1985. Where consolidated accounts are drawn up figures from those accounts will be used. The price/earnings ratio of 9 approximates to the lowest average price/earnings ratio of the taxpaying companies during the relevant periods, grouped by sector. 5.The period will be the first four financial years of the company beginning after flotation and ending before 1 April 1997. Where flotation took place too recently for four financial years to be completed, the period will cover financial years ending after flotation and before 1 April 1997. Where a financial year straddles flotation only the profits of the part of the year following flotation will be taken into account, on a time apportioned basis. 6.The charge to tax will arise on Budget day and the rate will be 23 per cent. 7.Where 85 per cent or less of the ordinary share capital of a company was offered for sale at the flotation of the company only the appropriate proportion of both - company value by reference to the average profits after tax, - and the value placed on the company at the time of flotation, will be taken into account in calculating the taxable amount. The appropriate proportion will be that which the shares offered for sale at flotation bear to the ordinary share capital of the company at that time. 8.There will also be rules to allocate the tax liability between companies which have demerged under statutory schemes. The allocation will be on the basis of the respective market capitalisations of the companies at the time of the demerger. 9.The tax will not be deductible in computing a company's liability to corporation tax and it will not be possible for a company to set advance corporation tax against liability to windfall tax. Administration of the tax 10.The tax will be centrally administered by the Inland Revenue. 11. The tax will be payable in two equal instalments on or before 1 December 1997 and 1 December 1998. Interest will be payable on tax paid late and on repayments of overpaid tax. 12.Each company liable to windfall tax will be required to make a return to the Inland Revenue, including a computation of its liability, by 1 December 1997 (the date when the first instalment of the tax is due). If not issued with a return a chargeable company must notify the Inland Revenue of its liability to the tax by that date. 13.Assessments to windfall tax will be made by the Inland Revenue. Where the amount of the liability is disputed there will be a right of appeal to the Special Commissioners. 14.Penalties will be charged where companies fail to comply with their obligations to notify liability or make a return, or where they make a return or supply information which is incorrect. 15. Where a company fails to pay the tax the Inland Revenue will be able to recover the tax from other companies in the same group as the defaulting company. Profit Related Pay 16. The rules relating to the calculation of profits for the purposes of profit related pay (PRP) will be amended to take account of the windfall tax with effect for all profit periods ending on or after today. This will enable the companies concerned, if they choose to do so, to calculate their employees' PRP on their profits before deducting windfall tax. NOTES FOR EDITORS 1.The companies falling within the scope of the windfall tax are BAA, British Energy, British Gas (now BG plc and Centrica), British Telecom, National Power, Northern Ireland Electricity, Powergen, Scottish Hydro, Scottish Power and Railtrack, the regional electricity companies and the privatised water and sewerage companies (including such companies now forming part of Hyder, United Utilities and Scottish Power). 2.A separate press release "Welfare to Work" covering the windfall tax, and the programme which it will fund, is being issued today by HM Treasury. Press enquiries to: 0171 438 6692/6706/7327