UK election 24
Britain decides: Exploring Labour's election tax plans

With the likely prospect of a change of UK Government as the general election looms on 4 July, we consider the Labour Party's tax policies ahead of its manifesto. Tax remains one of the most charged and sensitive areas for both the UK's main political parties – with Labour currently well ahead in the polls against the incumbent Conservative administration, its tax agenda will be pored over by business.

Businesses – Corporate tax

Labour has emphasised the need for stability and certainty in the business tax environment, along with a desire for the UK to be internationally competitive. Labour's Business Partnership for Growth sets out its proposals, many of which involve maintaining the status quo.

• Corporation tax rate: The headline rate will be capped at the current 25% for the next parliament but may be reduced if "tax changes in other advanced economies threaten to undermine the UK's competitiveness".
• Business investment regimes: Labour has pledged to retain permanent full expensing and the Annual Investment Allowance. It intends to publish detailed guidance on what investment qualifies for each regime to provide businesses with clarity on scope.

The Patent Box, as well as the current structure of the R&D tax credit system, will also be maintained over the next parliament. Labour additionally proposes to tackle fraudulent and erroneous R&D claims.  

• Business rates: One change Labour has promised is to replace business rates with an unspecified new system of business property taxation, with the aim of levelling the playing field between high street and online retailers.
• Global tax reform: Labour has committed to continuing the government's implementation of the Organisation for Economic Co-operation and Development's (OECD) global minimum corporate tax (often referred to as Pillar Two). The party also supports an OECD deal for the "fair taxation of digital multinationals" (which it is assumed refers to Pillar One of the OECD's reform package).

The oil and gas industry

Labour plans to increase the Energy Profits Levy (the so-called 'windfall tax') by 3%, leading to an effective tax rate for companies within this sector of 78%. Labour will also consider the removal of "loopholes" in the levy, which is understood to refer to the levy's valuable investment allowance. Labour's plan to backdate the extended levy to January 2022 has been dropped, and its proposal to extend the levy's sunset date to 2029 was adopted by the government at the spring 2024 Budget. In response, industry groups have claimed that any extension of the current levy may lead to the freezing of investment until at least the 2029 sunset date, and potentially significant job cuts.

The private equity industry

The UK currently taxes appropriately structured carried interest (ie, a share of the profits which arise to fund managers where investments in a fund perform above a certain level) paid to private equity managers as capital, at 28%. Labour proposes to tax carried interest as income, potentially at the top marginal rate of 45%. Labour forecasts this will raise £500 million over its first five years, but HM Treasury disputes this, estimating that Labour's plan will have a negative impact on the economy due to the potential exodus of highly mobile private equity managers, leaving the UK for destinations with more favourable tax regimes for these sorts of returns, such as France and Italy. It is assumed, however, that in power Labour would need to balance their stated desire for fairness with the need to retain the competitiveness of the UK's private equity industry – perhaps, it has been mooted, through use of a bespoke tax rate, sitting somewhere between the current CGT rate and top marginal income tax rate.

Policymaking cycle and advance rulings

Along with the themes of stability and certainty, Labour has argued that when change is necessary, the path should be predictable and well-signalled to business.

• Business tax roadmap: Labour has committed to publishing a roadmap for business taxation within the first six months of office, setting out scheduled changes affecting taxation of businesses for the parliament.
• Autumn Budget: Labour will hold only one annual autumn Budget, in the final two weeks of November, providing taxpayers with at least four months' notice of any announced changes taking effect at the start of the new tax year. This would be followed by a restated forecast in the first two weeks of March, which may also make minor policy changes.

The possibility of an 'emergency Budget' in this election year is, however, left open, " to put a Labour government's priorities quickly into practice".

• Advance rulings and clearances: Labour will trial greater use of advanced rulings and clearances for major investment projects, clarifying the tax treatment of investments before they happen, with the aim of increasing certainty for businesses and reducing the risk that the tax treatment of an investment may change.

Individuals – Personal taxation

• Income tax and national insurance contributions (NICs): Labour has recently ruled out any increase in income tax or NICs, insisting that the tax burden on working people should be "lower". However, Labour has not clarified its position on income tax and NIC thresholds, currently frozen until April 2028.
• 'Non-dom' regime: Abolition of the current preferential tax regime for UK resident, non-UK domiciled individuals (so-called 'non-doms'), has long been a key Labour pledge. The announcement at spring Budget 2024 by the government that the current regime is to be replaced by a residence-based system from April 2025 was broadly supported by Labour in opposition. However, Labour proposes to go further, closing what it maintains are "loopholes" in the government's reforms, including:
  • removal of the concession under which only 50% of foreign income would be taxed in the first year of the new regime; and
  • preventing non-doms from sheltering offshore assets from IHT by transferring them to an excluded property trust before the start of the new regime.
• Pensions: Since the government announced the abolition of the pensions Lifetime Allowance (LTA) (ie, the total amount that can be drawn from pensions savings without incurring a tax charge) in the 2023 spring Budget, Labour has been committed to its reintroduction. Extensive legislation in two Finance Acts has been necessary to enact the abolition, from April 2024, and Labour will face significant legislative and practical complexity in reintroducing it.

Previous plans for Labour to carve out senior NHS clinicians, and potentially a broader category of public sector leaders, from the LTA have reportedly been dropped in favour of reinstating the LTA at a higher level than it was set at previously, but these plans have not been formally confirmed by Labour.

VAT – Private school fees

It has been a consistent Labour policy for years that private school fees should be subject to VAT. Labour has said this key policy will be introduced in their first Budget but it is unclear whether the party will endeavour to apply it retrospectively, thwarting the attempts of some to prepay VAT exempt fees. Labour no longer plans to remove charitable status from private schools but does propose to end their current business rates relief.

Stamp duty land tax

In 2023 Labour announced their intention to increase the existing 2% stamp duty land tax surcharge for overseas buyers (including individuals, trusts and companies) acquiring residential property in England or Northern Ireland. Limited further information has since been made available to confirm this proposal.

Tackling tax avoidance

Labour aims to raise up to £5 billion annually by the end of the next parliament by tackling tax avoidance, as set out in Labour's Plan to Close the Tax Gap. Key proposals include:

• • increased investment in HMRC resources, leading to increased staffing and compliance activity;
  • focusing on larger, more complex business and offshore tax compliance;
  • improving customer service, with the aim of reducing taxpayer errors;
  • focusing on strategically important criminal cases to restore a deterrent effect (including the corporate offences of failure to prevent the facilitation of tax evasion);
  • requiring a wider range of "tax schemes" to be reported to HMRC under the existing rules for disclosure of tax avoidance schemes (DOTAS); and
  • strengthening HMRC's powers to enforce payment of tax in investigation cases.

To assist with this task, HMRC has appointed an expert panel to advise on compliance and modernisation of the tax system, including Bill Dodwell (former tax director at the Office for Tax Simplification) and Dame Margaret Hodge (former chair of the Public Accounts Committee).