Latest polling figures for the UK’s general election on 4 July continue to indicate a change in government as Labour, the main opposition party, enjoys a c. 20 percentage point lead over the Conservative Party which has governed the UK since 2010. What might this mean for tax? As promised, there were few surprises in Labour’s election manifesto as it tries to walk a tight line between the need to raise additional tax revenues and the aspiration to encourage economic growth, including through creating a system that is stable and certain. 

Private equity and capital gains

Labour promises not to raise the rates of income tax, national insurance, or VAT.  So what does this mean for the rates of other taxes where no such promise is given, in particular, capital gains tax?  When asked in a TV interview if Labour would increase the rate of capital gains tax to raise £14bn a year, Keir Starmer said “that is not in our manifesto”.  Which is true. 

What is in the manifesto, however, is the plan to bring “carried interest”, which is currently subject to capital gains tax, within the income tax net, which will necessarily mean it will bear tax at a higher rate than currently charged.  This is expected to bring in £565million. Although referred to in the manifesto as “closing the carried interest tax loophole”, there is in fact no loophole to be closed - this is simply how the current statutory regime for taxing private equity fund managers works, as a matter of policy. But describing the proposal as a change in policy would make for a less eye-catching headline!

Business tax: stability and certainty 

In a similarly eye-catching way, the manifesto announced that “Labour will stop the chaos” (apparently, under the Conservatives, “corporation tax has changed 26 times” although I still struggle to see where this number has come from; perhaps the number of fiscal events at which changes were made?) The chaos would be stopped through a strategic approach with a roadmap for business taxation which the Shadow Chancellor, Labour politician Rachel Reeves, previously indicated would be published within the first six months in office. They also want to make policy development more predicable by having only one major fiscal event per year advance and giving advance warning of policy changes. 

The manifesto further reiterates the Shadow Chancellor’s commitments made during Labour’s Business Conference back in February (speech and YouTube video) that Labour would cap the UK corporation tax rate at 25%. This should mean (as explained by the Shadow Chancellor at the time) that the rate will remain 25% unless the UK’s competitiveness comes under threat; in that case, Labour would act, if necessary, to reduce the rate. It is unclear what criteria Labour would apply to decide when action becomes necessary, but I think the bottom line is that the corporation tax rate is very unlikely to decrease over the next five years (especially given that the manifesto notes that the UK rate is “the lowest in the G7”). 

The retention of permanent full expensing (see this blog post) and the annual investment allowance for small businesses are further measures laid out in the manifesto that had been trailed by the Shadow Chancellor. The manifesto goes on to state that Labour intends to “give firms greater clarity on what qualifies for allowances to improve business investment decisions”. This does sound helpful – although, if it is done through HMRC guidance, it would raise the usual problems around the status of guidance (as HMRC’s view of the law rather than an authoritative explanation) and business taking a different view may be required to make a special notification that their filing is contrary to HMRC’s known position (if the relevant thresholds, e.g., in relation to size of the business and amount of tax at stake, are met).

International tax reform, business rates and digital services tax

The manifesto positions Labour as supporting “implementation of the OECD global minimum rate of corporate taxation and backs international efforts to make sure multinational tech companies pay their fair share of tax”. This is unsurprising. But at the same time, the manifesto also envisages that business rates (broadly a recurring charge on non-domestic properties) are replaced with a system which would have amongst its aims to “level the playing field between the high street and online giants”. This is somewhat reminiscent of the Conservative government’s business rates review which resulted in an abortive consultation on an online sales tax (which would have been intended to achieve the same aim). It will be very difficult (not to say impossible) to redesign business rates whilst maintaining the same level of revenue and achieve Labour’s aims. 

If it were found impossible to redesign business rates as envisaged, an increase of digital services tax (DST) might be revisited as an alternative way to achieve the particular aim of levelling the playing field between online and high street businesses. Labour had previously said that it had no plans to increase DST, but the manifesto does not now explicitly rule this out. If the DST rate were increased, this would likely increase tensions with the US – resurrecting the spectre of trade sanctions (for which there may be renewed appetite, depending on the outcome of the US elections in November).

Business tax: instability and uncertainty

So, the fact that the proposal for business rates reform still refers to parity between high street and online businesses does not necessarily bode well for certainty and stability in business taxation. Other proposals that conflict with this aim include “a renewed focus on tax avoidance by large businesses”, further tinkering with the energy profits (oil and gas) levy (EPL) and redesigning of the apprenticeship levy into a more flexible growth and skills levy, a 0.5% tax paid by employers on annual pay bills above £3 million. This tax was introduced in 2017 and, at the time, commentators surmised that the reason for its creation was the Conservatives’ promise not to increase national insurance contributions. So, a better policy choice (to reduce complexity in the tax system) might have been to increase employer national insurance contributions and abolish the levy. 

That Labour chose to announce further tinkering with the EPL is unfortunate for legal certainty (but unsurprising). The changes are again referred to as “clos[ing] the loopholes” although they are just changes to the legal regime: a three percentage point increase in the rate (which would take the rate at which oil and gas profits are taxed to 78%), removal of investment allowances and an extension of the EPL end date until the end of the next Parliament (which would mean 2029 given the 5-year election cycle). The last of these three measures is actually one which the Conservatives had already proposed in their Spring Budget 2024. There is, however, also some good news: Labour would retain the Energy Security Investment Mechanism (legislated in Finance (No. 2) Act 2024) which would switch off the EPL before its end date, if oil and gas prices fall below certain thresholds. The manifesto does not mention the Electricity Generator Levy, although it is not inconceivable that its end date could be extended to 2029 as well. 

The “renewed focus on tax avoidance by large businesses” (the manifesto goes to say “…and the wealthy”) may lead to a less co-operative and more combative approach by HMRC. The manifesto also refers to increasing registration and reporting requirements, strengthening HMRC’s powers and investing £855m per year in HMRC to improve technology and build capacity. These three measures are not presented as targeted at large businesses or the wealthy, but a further increase in HMRC powers is concerning. There has been public criticism of HMRC’s handling of cases involving individuals and, over recent years, we’ve already had reams of widely drafted, rather punitive legislation targeted at a small number of persistent promoters (who may well remain undeterred). A better way forward would be to properly resource specialist teams who can respond in a timely manner to marketed schemes and prevent their spread. But this would also require confronting what may be an uncomfortable truth for politicians seeking quick wins – nowadays, aggressive tax avoidance by large businesses is much rarer than in the early 2000s (HMRC’s own figures for the tax gap, i.e. the difference between tax collected and total theoretical tax liabilities, for the tax year 2021/22 attribute only 11% of the gap to large businesses compared to 56% for small businesses, and only 4% of the tax gap is caused by tax avoidance to start with). 

Other tax measures

The manifesto also proposes 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”. This refers to the remittance basis of taxation whereby individuals who are tax resident, but not domiciled, in the UK are taxed on their foreign income and gains only to the extent these are remitted to the UK (but, if they opt into the regime, individuals would also lose certain allowances and have to pay an annual charge if they have been resident in the UK more than a certain amount of time). The Conservative Government had already proposed to replace this regime with a residence-based one where new arrivals would benefit from full tax relief for a period of four years after which they would be subject to tax on foreign income and gains in the same manner as other UK residents. It looks like the regime that Labour is proposing would be less generous.

They also refer to ending the use of offshore trusts to avoid inheritance tax, a one percentage point increase in stamp duty land tax on purchases of residential property by non-UK residents and applying VAT and business rates to private schools – a measure that has already attracted a lot of press coverage in the UK. 

What do other parties say?

Several other election manifestos have also been released this week. We will not be covering them on this blog, but if you would like to have a look at them, here are the links: Conservative Party, Green Party and  Liberal Democrats.