Contractors, entrepreneurs and wealth creators are highly mobile, able to quickly relocate and operate anywhere in the global economy. Make the tax regime unfriendly, and contractors will up sticks and move operations elsewhere. That’s exactly what happened when the Chancellor slapped a windfall tax on the oil and gas sector in the 2011 Budget.
The impact of a punitive tax rate imposed in the 2011 Budget on oil and gas revenues from the North Sea, which drove the marginal rate up to 80%, from 62%, was immediate. Several high profile production projects were postponed by global energy corporations and a huge amount of exploration work was axed.
The sector’s swift and predictable response to the Chancellor’s punitive tax move should act as a stark reminder to George Osborne and the Treasury not to overtax sectors of the UK’s economy that contribute so much to our global competitiveness -- not to mention UK tax revenues.
Let’s hope the Chancellor noted that, with oil and gas being a highly globalised sector, exploration and production budgets were simply reallocated to other territories with more stable and less excessive tax regimes. His advisers will no doubt be pointing out that the impact is still being felt more than 15 months later, as the latest report by industry body Oil & Gas UK clearly shows.
Tax policy is directly responsible for holding the sector back, which seems daft when you consider each £1bn spent by energy corporations on North Sea development generates up to 20,000 well-paid contracts and jobs. Those workers in turn pay vast amounts in taxation.
The result of Osborne’s misjudgement last year may have been a short-lived increase in tax revenues immediately after the Budget, and some snappy soundbites showing how tough the government can be on sectors perceived to be making more money than they should. But in the medium to long-term, it will cost the UK dearly in terms of jobs, contracts, reduced production, lower taxes, greater reliance on imports and irrevocably damaged confidence in doing business in the UK.
Contractors, entrepreneurs and wealth creators in general are currently the subject of the ill-informed and misguided government crusade on tax issues. So, perhaps we ought to remind the Chancellor what the impact of poorly thought through taxation strategies may be.
Like the oil and gas industry, the contracting, creative and entrepreneurial sectors look like high earning easy targets that won’t miss a few extra quid if taxed more heavily. Plus it makes great headlines for the government to be seen to be making successful people pay their ill-defined ‘fair share’.
But what is likely to happen if you start taking away too much of what contractors and entrepreneurs work incredibly hard to earn? In a knowledge economy, the equivalent plant and capital assets, ie contractors, are eminently portable. And in a globalised economy, so is wealth. Raise taxes too high and those taxpayers who can will vote with their feet and move to less highly taxed jurisdictions. Similarly, the talent, wealth and entrepreneurship that are attracted to tax regimes that encourage the successful will be lost to the UK if the country is perceived to have a punitive or changeable tax regime.
Fortunately, as with so many of his other ill-judged moves, the Chancellor has started to compromise over the windfall tax on North Sea revenues. We’ve not yet had the full Osborne U-turn, but he has recognised that to alienate the energy giants is to potentially lose the 440,000 jobs and up to £15.6bn in tax revenues each year that Oil & Gas UK’s Economic Report 2012 shows the sector is worth to our economy.
Through the work of PCG and independent researchers, we are moving ever closer to understanding quite how much tax revenue and how many jobs the contracting, creative and entrepreneurial sectors contribute to UK plc. You can bet it is more than oil and gas.
Perhaps the Chancellor can learn some lessons in taxation from his experience with the oil and gas sector before making the same mistakes with contracting and other wealth-creating sectors of the economy. Let us hope so.