UK election 24
Bombshells defused? Exploring Labour's UK tax plans

Halfway through the UK general election campaign, the polls still indicate the near-certain prospect of a change in government as the nation goes to the voting booths on 4 July, representing the first full change of administration since 2010.

With the Labour Party on course for victory, the launch of its manifesto on Thursday (13 June) will have business poring over its commitments for fresh insight in what the new government would do in the key field of tax. With public finances facing considerable strains in recent years, can a new government strike the difficult balance of appeasing voters wanting investment in public services alongside the creation of a business-friendly tax environment?

The manifesto yields few surprises, with most (if not all) policies having been trailed over recent weeks and months. Although one of the main themes in the document is the provision of a stable and certain tax environment - particularly for businesses - the manifesto remains light on detail, which itself leaves taxpayers and their advisers lacking certainty. The parameters and timing of significant policies, including changes to taxation of private equity carried interest, reform of the Energy Profits Levy and the imposition of VAT on school fees, are absent from the document, which is perhaps to be expected given the high-level nature of any manifesto.

We set out and analyse the key policies below.    

Business – Corporate tax

• 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 countries pose a risk to UK competitiveness".
• Business investment regime: Labour has pledged to retain a permanent full expensing system for capital investment, as well as the Annual Investment Allowance for small businesses. It intends to provide greater clarity on what qualifies for these allowances to improve business investment decisions. No mention is made in the manifesto of the Patent Box and current R&D tax credit system, which Labour's Business Partnership for Growth document (February 2024) noted would be retained.
• Business rates: Labour considers that the current business rates system disincentivises investment, creates uncertainty and places an undue tax burden on our high streets. In England, Labour will replace the business rates system with an unspecified new model, with the aim of levelling the playing field between the high street and online retailers and encouraging entrepreneurship.
• Global tax reform: Labour supports implementation of the Organisation for Economic Co-operation and Development's (OECD) global minimum rate of corporate taxation (often referred to as Pillar Two). The party also supports international efforts to "make sure multinational tech companies pay their fair share of tax" (which it is assumed refers to Pillar One of the OECD's reform package).

The energy industry

• Energy Profits Levy: Labour plans to increase the Energy Profits Levy (the so-called 'windfall tax') on oil and gas companies by 3%, leading to an effective tax rate for companies within this sector of 78%. Labour will also extend the sunset date for the Levy to the end of the next parliament (the Conservatives also announced at Spring Budget 2024 that they planned an extension to 2029). The Energy Security Investment Mechanism, by which the Levy may terminate early if oil and gas prices return to historically more normal level, will be retained. Significantly, Labour has now confirmed that it plans to remove the Levy's valuable investment allowance, referred to by Labour as "unjustifiably generous".
• UK carbon border adjustment mechanism: Labour supports the introduction of a UK carbon border adjustment mechanism, which is intended to deter the movement of carbon-intensive production of goods, such as iron and steel, out of the UK to countries with less stringent climate policies.

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's manifesto sets out the party's intention to "close this loophole". However, no further details of this reform are provided, including the rate at which Labour intend to tax carried interest (potentially at the top marginal income tax rate of 45%, or at a more competitive bespoke rate somewhere between 28% and 45%) or the timing of this policy.

Individuals – Personal taxation

• Income tax and national insurance

Labour's intention is to "not increase taxes on working people". Consequently, it will not increase the basic, higher or additional rates of income tax, or national insurance. The manifesto is silent as to Labour's position on income tax and national insurance thresholds, which are 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 government has already announced, at Spring Budget 2024, that the current regime is to be replaced by a residence-based system from April 2025, but this has not yet been enacted. If in power, Labour would therefore be free to adopt the government's proposals, adapt them or introduce an entirely different scheme. Labour's manifesto pledges to "abolish non-dom status once and for all", replacing it with a "modern scheme for people genuinely in the country for a short period", but no further detail is provided.

Labour's manifesto also states its intention to end the use of offshore trusts to avoid inheritance tax.

• Pensions

Labour plans to undertake a "review of the pensions landscape" to consider steps to improve outcomes and increase investment in UK markets. Specific reference to pensions taxation is absent from the manifesto, including Labour's long-held intention to reintroduce the Lifetime Allowance, abolished by the government from April 2024. If this policy has been dropped by Labour, it will bring welcome certainty to wealthier pension savers.

VAT

Labour does not intend to increase VAT, other than in respect of its consistently held policy to end the VAT exemption for private school fees (as well as business rates relief for private schools). The manifesto gives no further detail of this policy, including when it will become effective, whether it will be implemented in a phased manner or whether Labour will endeavour to apply it retrospectively.

Real estate – Stamp duty land tax

Labour will increase by 1% the existing 2% stamp duty land tax (SDLT) surcharge for overseas buyers acquiring residential property in England and Northern Ireland.

Labour's manifesto also refers to ending "the farce of entire developments being sold off to international investors", rather than first-time buyers, before houses are built. This statement is not explained further but we await to see whether this policy could potentially be implemented through a tax mechanism.

Tackling tax avoidance

Labour will address tax avoidance through an unspecified "change of law" and modernisation of HMRC, including strengthening the agency's powers, investing in new technology and building capacity within HMRC. In particular, reference is made to a renewed focus on tax avoidance by large businesses and wealthy individuals. The manifesto also states Labour's intention to "increase registration and reporting requirements" though it does not set out which areas may be affected. Any increased administration will not be welcomed by businesses, who have already seen a big increase in the complexity and cost of tax compliance.

The policymaking cycle

Consistent with the manifesto's themes of stability and certainty, Labour's intention is that when it is necessary to introduce change, the path should be well-signalled and allow for long-term planning by taxpayers. Labour will hold only one Budget each year, to be accompanied by an independent forecast from the Office for Budget Responsibility. Additionally, Labour will publish a 'roadmap' for business taxation, setting out scheduled changes affecting the taxation of businesses for the parliament, with the intention of allowing businesses to confidently plan their investments.