Water companies face £1.65 billion windfall tax

Windfall Tax to Raise Almost Five Billion

Gordon Brown told a packed Commons that the £4.8 billion raised by the windfall tax would be used to fund the "welfare to work" programme, as well as investment in schools.

Presenting details of the tax, the Chancellor said it would raise £2.1 billion from the electricity sector, around £1.65 billion from the water companies and another £1.45 billion from the remaining companies.

But in a conciliatory measure, Mr Brown said he had agreed, following requests from many companies, to allow the windfall tax to be paid in two instalments, one on December 1 this year, the second a year later.

The Chancellor said he believed he had struck a fair balance recognising the position of the utilities today and their under-valuation and under-regulation at the time of privatisation.

Cash for schools

Under the government's proposals, a company's windfall tax would be based on the difference between the value that was placed on it at privatisation and a more realist market valuation based on after tax profits up to the first four full accounting years following privatisation.

"I am satisfied that no company faces an unduly heavy tax burden," said Mr Brown.

He said in his judgment the tax can be paid with no impact on prices, investment, quality of service to customers, or employment.

The reduction in gas levy would cost the Government £400 million over the next three years but the net effect of the levy and the windfall tax together would raise £4.8 billion.

The full details of the companies liable for the windfall tax were announced by the Inland Revenue shortly after the Chancellor finished his speech.

The power utilities British Energy, British Gas (now BG and Centrica), National Power, Northern Ireland Electricity, PowerGen, Scottish Hydro, Scottish Power as well as the regional electricity companies would all be affected by the tax.

The telephone giant, BT, was also named, as was the British Airports Authority (BAA) and Railtrack.

The privatised water and sewerage firms, including companies forming part of multi-utilities such as Hyder and United Utilities, would also be liable for the tax, as well

According to the Inland Revenue, the tax will be charged at a rate of 23% 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 general mood among the utilities following the Budget was one of disappointment mixed with resignation. The spectre of legal challenges raised by several firms, not least BT, seemed to be diminishing.

The Midland Electricity Chief Executive Mike Hughes said he was "extremely disappointed" and warned jobs were at risk. "It is much bigger than we feared. It falls more heavily on electricity companies than I think is fair," he said.

"It clearly is going to cause us to look at investment and investment levels will fall. It will cost jobs," he added.

BT's chairman Sir Iain Vallance had warned that he considered it his duty to challenge the tax. But speaking after the Budget, he said the £500 million BT predicted it will have to pay is "considerably lower" than expected and that BT's "special characteristics" seemed to be have been noted.

"This will no doubt help the BT Board when it decides how to proceed once the Finance Bill has been published," he added.

But Anglian Water also ruled out any court action but said its anticipated hit of between £170-£180 million would have to be borrowed, meaning less money for improving services and for environmental protection.