Reeves's potential windfall tax will crumble FTSE 100 giants and "diminish UK's stature as global financial hub"
The FTSE 100 could see most or all of its gains this year reverse course. Major oil and gas companies, as well as banks are in new Chancellor Rachel Reeves’ crosshairs, as she attempts to raise funds to cover the £22bn “black hole” in the country’s finances. The Chancellor could now be eyeing up a potential windfall tax on these corporations despite saying before the general election that there were no such plans to do so.
If Reeves does decide to instil a windfall tax, it could have severe ramifications on Britain’s premier index. Heavyweights like Shell, BP, and HSBC make up the top five constituents of the FTSE 100. Altogether, the three constitute almost a fifth of the FTSE 100’s weighting (18.9%) – meaning that any significant movement in their share prices could sway the benchmark greatly.
North Sea giants are already paying a 35% Energy Profits Levy (EPL) based on the previous administration’s legislation, equating to a tax rate as high as 75%. However, Labour could hike the rate to 78% or higher, while also removing the ability to have any tax deducted if the money is spent on investment and exploration.
A similar increase for banks may be implemented as well. Banks already pay a levy – a charge introduced in response to the global financial crisis in 2008 to cover any future financial shocks. Currently, banks are taxed at a rate of 0.1% for short-term liabilities and 0.05% for long-term liabilities, but that could be doubled.
It’s also worth noting that energy and bank stocks make up 24.3% of the FTSE 100. As such, a windfall tax on these sectors could end up doing a lot of damage. In the near term, it would drastically reduce their profits, and impact their earnings per share, which is how stocks are usually valued. More worryingly, it could also damage the investment theses of these stocks and drive further investment away from an already beleaguered British stock market.
Newspage asked economists, analysts, and experts for their views on how this could impact foreign investment in the UK, the FTSE 100, and other measures the government could take to avoid harming the key sectors of the economy.