The tax landscape under the new Labour government

5 July 2024 / Insight posted in Article

The United Kingdom’s general election, held on Thursday 4 July 2024, resulted in a comfortable majority in the House of Commons for the Labour Party under Sir Keir Starmer’s leadership. The Labour Party’s political manifesto, first published on 13 June 2024, sets out the tax and public spending policies which they intend to deliver for the British public now that they have been invited to form a new government.

The manifesto needs to be considered in the context of the UK’s current economic climate. The Labour Party have committed to stabilise, and subsequently, reduce debt as a share of national income. In an economic climate of relatively low real economic growth and high debt interest costs, economists note that this commitment will place some restraints on the government’s ability to either increase public spending or cut taxation. This is, perhaps, why we saw suggestions from the main parties, including the Labour Party, that substantial amounts of additional revenue could be found through various initiatives to close tax avoidance loopholes and improve tax administration processes. The amounts of additional revenue that the main parties expected to raise in this manner appeared optimistic, but the Labour Party’s figures were perhaps the most realistic at £5.23bn. The viability of the new government’s manifesto pledges will, nonetheless, rest on continued economic growth in line with Office for Budget Responsibility (OBR) forecasts on the basis that the Labour Party’s proposals are being cast as “fully funded”. In light of how the Labour Party have committed to not increase a number of key taxes, it remains to be seen whether they are approaching the current fiscal climate with sufficient caution given the obstacles they are likely to face.

We have provided a summary of the key tax proposals within the Labour Party’s manifesto, together with some brief comments from our experts in our private client and business & corporate tax teams, below.

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Private client tax

Labour proposals

The Labour Party’s manifesto pledges on personal tax were not exceptionally developed nor extensive. The Labour Party have however committed to not increasing national insurance contributions (NICs) or the “basic, higher, or additional rates” of income tax.

The manifesto confirms the Labour Party’s previously announced proposal to fully abolish non-UK domiciled status and eliminate the opportunities available to avoid inheritance tax through the use of offshore trust structures. There is, however, limited information as to how a new “modern scheme for people genuinely in the country for a short period” might be structured and how it might differ from the Conservatives’ replacement non-UK domiciled regime announced at the Spring Budget 2024.

It had previously been announced that proposals would be put forward to close the carried interest loophole whereby certain performance-related incentives given to private equity executives are subject to capital gains tax, at an enhanced rate of 28%, instead of income tax. The inference appears to be that the Labour Party intends to tax all carried interest as income, but there are no further details on how the party might approach this from a policy design or technical perspective.

Moore Kingston Smith comments

Whilst there is currently no firm suggestion that the Labour Party would seek to increase personal taxation, the wording in the manifesto does not completely exclude changes to the personal tax system. The Labour Party’s confirmation that they will not increase the “basic, higher, or additional rates” of income tax does perhaps allow them to tinker with other aspects of the income tax system, such as adding new rates, changing the thresholds or extending the current freeze on the thresholds. Whilst the manifesto pledges not “to increase taxes on working people”, ancillary comments made by senior Labour Party figures indicate that this pledge may not extend to exclude changes to the taxation of savings and/or investment income. There is similarly no clarity on whether the commitment not to increase NIC rates will also extend to employer NICs.  In addition, as they have not explicitly ruled out any increases to capital gains tax or inheritance tax, the door has been left open on that front. This does, therefore, perhaps give the Labour Party some fiscal headroom to manoeuvre, but also means that there is some uncertainty for taxpayers as to what changes may come in the future.

We are still not clear on how the Labour Party will diverge from the current proposals put forward by the Conservatives on the taxation of non-UK domiciled individuals. The Labour Party have clearly indicated that they will go further than the Conservatives on the non-dom changes, which will include taking a firmer stance on offshore trusts and the closing of perceived “loopholes” but it is not currently clear what, in practical terms, this would entail. The detail will be crucial here – the changes will have a significant impact on a small but highly mobile population whose behavioural response will affect the estimated tax raising impact of Labour’s plans.

Labour’s approach to changing the taxation of carried interest will need to be further substantiated for us to develop an understanding of the approach the party intends to take. The proposal has, however, been subject to some interesting public and academic debate. The Labour Party believe that this will raise around £500m per annum in the first five years but the Financial Times have reported HM Treasury estimates indicating that the UK economy could be £3.3bn worse off by 2029 if the policy is pursued. Commentators have raised concerns that changes to the taxation of carried interest in the post-Brexit landscape may result in the UK becoming an uncompetitive jurisdiction for fund managers. Despite these concerns, the ultimate effect will completely depend on the design of any reform so we will need to wait and see how this policy takes shape.

Business and corporate tax

Labour proposals

The Labour Party manifesto includes a pledge not to increase corporation tax above the current level of 25%, with a suggestion that the party may be willing to take necessary steps “if tax changes in other countries pose a risk to UK competitiveness”. The party will also retain full capital expensing, together with the annual investment allowance, as introduced by the former Conservative government.

The party have, however, proposed the complete replacement of current business rates with an alternative system, although the design of this new system is not specified in the manifesto. The party also intends to extend the sunset date of the windfall tax on oil and gas companies (known as the Energy Profits Levy) until, at least, the end of the next parliamentary term, increase the levy rate by 3%, and facilitate changes to some of the allowances and mechanisms.

Moore Kingston Smith comments

We expect that many businesses and companies will respond positively to the Labour Party’s proposals in this area. It appears that the Labour Party are looking to maintain the status quo by committing not to increase the rate of corporation tax and retaining full capital expensing for companies and the annual investment allowance for smaller businesses. Businesses might also be hopeful about the Labour Party’s proposal to publish a full roadmap for business taxation, which may provide some reassurances and clarity as to the future direction of the new government’s tax policy in this area.

The Labour Party have, however, remained silent on whether they will seek to retain various reliefs, such as capital gains tax business asset disposal relief, inheritance tax business relief, and the various venture capital tax reliefs. This does, therefore, perhaps leave the door open for potential changes to these reliefs in the future but there is no firm suggestion that the party intend to make policy changes in this area.

Indirect tax and duties

Labour proposals

The Labour Party have committed not to increase the current rate of VAT but have, not unexpectedly, confirmed their much debated and publicised proposal to introduce VAT to private school fees.

The party have also committed to increasing the stamp duty land tax surcharge by 1% (i.e. from 2% to 3%) where residential property is acquired by a non-UK resident.

The Labour Party have also committed to press on with the introduction of the UK’s carbon border adjustment mechanism on the import of certain goods with high embedded carbon emissions.

Moore Kingston Smith comments

The Labour Party’s proposed introduction of VAT on private school fees has dominated the public debate on VAT in recent months and will not be repeated here, particularly as we previously ran a webinar on the proposals. The Labour Party have, not unsurprisingly, committed to not increasing the current rate of VAT although they remain silent on changes to the registration and deregistration thresholds (currently £90,000 and £88,000 respectively). The policy debate around VAT is, however, currently focused on the system as a whole and how different supplies are, sometimes arbitrarily, classified as zero, reduced, or standard-rated. Therefore, it will be interesting to see if a future government does consider any structural reform to VAT.

Whilst the Labour Party intends to increase the tax burden on non-residents acquiring UK residential property, this does not present a fundamental or significant change to stamp duty land tax. It is perhaps disappointing that there is no commitment to a more fundamental review of stamp duty land tax, in light of how unpopular the tax is amongst tax policy experts, economists, and the wider public.

There is little focus on environmental measures and taxation. The Labour Party are committed to the carbon border adjustment mechanism, which is a sensible policy initiative, but there is a need to replace fuel duty revenues considering the increasing prominence of electric vehicles in the coming years and this will, undoubtedly, need to be addressed in the near future.

Other measures

Labour proposals

The Labour Party have taken the view that they can raise substantial amounts in the region of £5.23bn per annum by clamping down on tax avoidance and evasion by modernising HMRC and changing the law’s approach to tax avoidance.

Perhaps most notable are some of the Labour Party’s proposed changes to employment law, which will impact various areas of employment tax although the detail is still due to be confirmed. We previously explored these proposals in a separate insight article.

The Labour Party intend to return to an annual fiscal event, as opposed to holding multiple fiscal events (such as the budget, mini-budget, and autumn statement in recent years) every year. Finally, the party intends to strengthen the Office of Budget Responsibility to ensure that independent fiscal forecasts accompany each fiscal event.

Moore Kingston Smith comments

All the main political parties, in the run up to the general election, were expecting to raise substantial revenue through reducing the tax gap but there were a lot of concerns voiced around whether these figures could be substantiated or viable. The fact that the Labour Party’s estimate of £5.23bn per annum falls slightly below the Conservative estimate of £6bn, and Liberal Democrats estimate of £7.2bn, perhaps indicates that the Labour Party are taking the most realistic approach in this area. However, this will be an important area to monitor as failure to raise the amounts asserted by the Labour Party would have a substantial fiscal impact on the viability of their other manifesto pledges.

The Labour Party’s announcement that they intend to return to an annual fiscal event would provide some welcome stability in tax policy. However, we should perhaps approach this announcement with some scepticism. Philip Hammond, as Chancellor of the Exchequer, announced the same policy in 2017 but it has proven difficult, at least for the previous Conservative government, to stick to this policy.

It is also disappointing not to see the Labour Party taking any steps to consider more substantial reform to our outdated council tax system. Properties have not been revalued, for council tax purposes, in 33 years meaning that the system is based on inaccurate metrics and inherently unfair to many. Council tax is long overdue a review.

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