Introducing a windfall tax on train operating companies will only make things worse

Duncan Simpson

August 17, 2018

Andy McDonald, the shadow transport secretary, has suggested introducing a windfall tax on train operating companies (TOCs), supposedly to pay for a fare freeze for commuters. This will punish both those commuters, who tend to be wealthier than the average Brit already, as well as all taxpayers.

The most recent figures show that TOCs’ total income less expenditure was £271 million. As a proportion of passenger income, this is just 2.9 per cent. They are clearly not robber barons exploiting commuters. And, of course, they are paying corporation and other taxes already too.

The idea that dividends to TOCs are shafting train users is another straw man. Dividends as a percentage of passenger revenue have hovered between two and three per cent over the past five years. The Government also received £0.7 billion from TOCs in 2016-17 in franchise payments, after accounting for the subsidy that the TOCs were given as part of their franchise agreement.

Introducing a windfall tax will discourage companies from competing for a franchise in the first place. We have already seen a steep, worrying reduction in those who want to provide services. With even fewer in the running, all taxpayers, whether they use trains or not, would be liable if a franchise goes wrong.  More taxpayers’ cash will have to be found to make train operating companies’ ventures viable in the first place.

Allusions are often made to Europe: if they can have a much more integrated and taxpayer-funded system, then why can’t the UK follow their lead and begin the process of renationalisation? This is wrong on two counts.

First, the level of taxpayer subsidy is substantially higher in Europe. So we’d all have to pay a lot more to end the current quasi-private franchising system. Admittedly, speeding through France on a TGV can be a pleasant experience. Yet when one looks at the wider picture across Europe it isn’t so rosy. Investment and passenger journeys have lagged well behind the UK in recent years.

Indeed, the idea that renationalisation is the answer is laughable. Almost two thirds of delays are caused by Network Rail (ie. the nationalised part of the railways). The end of British Rail has seen a huge growth in passenger numbers, with better rolling stock and much-improved accountability and service than the dark days of the past. That is not to mention the massive private sector investment that is finally starting to bear fruit in London Bridge, Kings Cross and large regional hubs.

If we reflect on when the East Coast service was taken over by the state in 2009, we get an indication of how things can quickly go wrong.

The Public Performance Measure (number of long-distance trains arriving within 10 minutes of their scheduled time) of East Coast Main Line Company Ltd never improved on its best performance in Q1 2009-10 of 90.4 per cent, dropping to 77.1 per cent in the final quarter when it was in state hands.

Furthermore, the deal did not generate billions for the taxpayer, as commonly assumed. Rather, the total level of taxpayer subsidy came to £80 million, with no dividend payments except in the final year of £18.6 million.

And if we look at Heathrow Express – a genuinely private enterprise in that it is not subsidised and is an open access operator – we see a great success story. It has the highest overall passenger satisfaction in the country, and the second best performance in terms of delays according to the most recent data.

Rises in ticket prices based on changes to inflation are understandably frustrating for commuters already struggling under the highest tax burden in the UK for 49 years. But knee-jerk measures like that proposed by Mr McDonald will only add to commuters’ annoyance and cost us all more money further down the track.


Written by Duncan Simpson

Duncan Simpson is a policy analyst at the Taxpayers' Alliance.


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