New tax on share buybacks could raise billions for UK, say IPPR and Common Wealth

27 Oct 2022 10:18 AM

Companies channeling windfall profits to their shareholders at the expense of households – through dividends and buybacks – should face extra taxes to raise important revenue and boost investment, say IPPR and Common Wealth. 

• Windfall tax on “buyback” profit transfers by Shell and BP alone could raise £4.8 billion per year 
• Annual buyback tax matching Biden levy could raise £225 million per year 

Britain's largest companies are transferring profits to their shareholders at record rates. Cash transfers through dividends and buybacks are now 30 per cent higher than their previous peak in 2018, having rebounded three-fold since the pandemic. FTSE 100 companies have already announced £46.9 billion of share buybacks so far in 2022.  

President Biden has recently introduced a 1 per cent tax on share buybacks to help alleviate the cost-of-living crisis in America.  

IPPR and Common Wealth have modeled several alternative taxes which the government could adopt: 

• Introduce a 1 per cent tax on share buybacks by FTSE-listed companies to raise £225 million in a single year.  
• An emergency windfall tax on all share buybacks at a higher rate. If taxed at the same 25 per cent rate as the windfall tax this could raise a maximum of £11 billion a year.  
• Target share buybacks by companies already subject to the windfall tax. Levied at 25 per cent, this tax would raise up to £4.8 billion from Shell and BP alone. 
• Bringing dividend taxes in line with income tax rates to raise £6 billion a year. This would also close one of the loopholes which allows asset holders to accrue wealth while paying less taxes than workers. 

While dividends are a well-known mechanism to distribute profit to shareholders, share buybacks are another way firms transfer profits by repurchasing their own shares, increasing the value of remaining shareholders’ stock. 

BP and Shell alone have transferred £19.9 billion of their profits into buybacks this year. BP invested 10 times as much buying its own shares as it has been reported it invested in renewables in the first half of this year. Shell spent seven times as much on buybacks as its reported renewables investment. 

As households across the UK struggle with an economic crisis, some companies are reaping extraordinary windfall rewards and passing these to already-wealthy shareholders. 

The benefits of taxing buybacks and dividends include: 

• Economic justice – windfall profits are transfers of wealth away from households, via companies, to wealthy shareholders. A tax would fairly redistribute this by funding public services or the energy price guarantee. 
• Raising tax revenue – raising tax revenue for the treasury in a progressive way, which could fund vital public services and support for vulnerable households this winter. 
• Boosting growth – if instead of channeling money to shareholders companies invested profits into new opportunities, their staff, or innovation, the economy as a whole would benefit. 
• Decreasing inflation – with lower transfers to shareholders, companies could instead pass cost reductions to consumers by reducing prices. 

Joseph Evans, researcher, at IPPR said: 

“Since the calamitous mini-budget there has been increased talk of cuts and efficiency savings, but there is an alternative. Some companies have been channelling record profits to their shareholders. It would be only fair, during this cost-of-living crisis, to implement a modest tax on dividends and buybacks to give the government increased revenue to fund our public services.  

“The introduction of such a tax would also encourage companies to change their behaviour: instead of taking money out of their business and handing it to shareholders, they might consider investing in the future to grow the economy, or reduce prices for customers to help tackle inflation.” 

Chris Hayes, senior data analyst, at Common Wealth said: 

“In normal times, ending the preferential tax treatment of shareholders relative to workers is a no-brainer. But in a time of crisis, when large companies are enjoying windfall profits and shovelling record buybacks to their shareholders, instead of investing productively or passing the benefits on to their customers, it is a matter of urgency.”  

Joseph Evans, Dr George Dibb, and Chris Hayes, the report’s authors, are available for interview  

NOTES TO EDITORS 

The IPPR paper, Buy back better: The case for raising taxes on dividends and buybacks, is available here: Buy back better: The case for raising taxes on dividends and buybacks

Companies currently pay stamp duty of 0.5 per cent on buybacks. Revenue projections for a buyback tax assume that share buybacks among FTSE companies remain at levels seen in the year-long period between Q3 2021 and Q2 2022. This is less likely if buybacks are taxed at a significantly higher rate, therefore our 25 per cent tax rate estimates are a maximum amount such a tax could yield. However, as we outline, deterring companies from share buybacks is likely to still have positive spill-over benefits for investment and the wider economy. 

This report is published in collaboration between IPPR and Common Wealth as part of a programme of work exploring profits and corporate power post-pandemic .

IPPR and Common Wealth previously investigated windfall post-pandemic windfall profits of UK-listed firms in Prices and profits after the pandemic. Profits of the largest non-financial companies were up 34 per cent at the end of 2021 compared to pre pandemic levels with 90 per cent of increases in profits accounted for by only 25 companies. 

Shareholder transfers overwhelmingly benefit the wealthiest members of society. Recent analysis by Common Wealth demonstrates that the top 1 per cent of households overwhelmingly dominate the direct ownership of UK shares. Prior to the pandemic over one-quarter of the total income of the richest 1 per cent was generated from dividends and partnership income alone. 

Figures for BP and Shell’s investment in renewables are sourced from a recent investigation by Channel4. 

IPPR is the UK’s pre-eminent progressive think tank. With more than 40 staff in offices in London, Manchester, Newcastle and Edinburgh, IPPR is Britain’s only national think tank with a truly national presence. www.ippr.org 

Common Wealth is an independent progressive think tank that designs ownership models for a democratic and sustainable economy. www.common-wealth.co.uk