General Election 2024: Labour tax policy

As promised in the run up to the manifesto being launched, it does not contain any surprises. Labour’s key tax revenue-raising pledges remain to:

• Abolish the non-dom regime
• Add VAT to private school fees
• Increase and extend the energy profits levy
• Close the carried interest “loophole”, which is understood to mean taxing carried interest to income tax as opposed to capital gains tax

Commentary

The carried interest proposal will have a significant impact on how the UK is viewed within the international private equity industry.  Many argue that the current regime strikes a balance between encouraging investment managers to base themselves in the UK and providing a fair and reasonable level of taxation.  Senior executives are more mobile and flexible than ever and so may choose to relocate to a more favourable jurisdiction prior to the receipt of any returns if a tax system is seen as too onerous.  The result could be not just a reduction in the overall tax take, but also a loss of long-term capital funding for UK businesses as well as a drain of knowledge and expertise from the UK economy.

The manifesto contains very little detail on the proposed changes to the ‘non-dom’ regime. While the comments remain in line with previous announcements made in relation to the abolition of the regime, there have been mixed messages regarding the retention of the inheritance tax benefits of offshore trusts. The manifesto states “We will abolish non-dom status once and for all, replacing it with a modern scheme for people genuinely in the country for a short period. We will end the use of offshore trusts to avoid inheritance tax so that everyone who makes their home here in the UK pays their taxes here”. This shows Labour’s intention, however there is no indication as to the length of this ‘short period’, and whether or not this would differ from the four year period announced by the current Government in the Spring Budget 2024. There is similarly no detail on Labour’s proposed inheritance tax changes for offshore trusts. While not confirmed in the manifesto, Labour have previously suggested that they would cut back on the transitional reliefs proposed by the Conservatives, leaving those affected with a potentially harder landing.

The proposed changes for non-doms and to offshore trusts are not only significant and extremely unsettling for some non-doms, but may well require a substantial rewrite of the inheritance tax legislation. While other inheritance tax changes are not confirmed nor ruled out, updating the legislation to reflect these proposals may provide Labour with an opportunity for further and more sweeping inheritance tax reform.

Taxes with potential room for manoeuvre include:

• Capital gains tax - the manifesto is silent in relation to capital gains tax. This silence has been a focus from the media, with Labour sticking to a line that there are “no plans” to increase capital gains tax, but stopping short of ruling that out
• Inheritance tax – the manifesto was silent on inheritance tax (as noted above)
• Income tax – the wording in the manifesto around income tax also leaves scope for income tax announcements at a later date

Manifesto pledges

Manifesto pledges on personal tax policies include:

• No increase to national insurance
• No increase to the basic, higher, or additional rates of income tax
• Abolish the non-dom regime, and replace it with a system for short-term residents
• End the use of offshore trusts to “avoid” inheritance tax for those making their home in the UK
• Tax carried interest as income rather than as capital gains

Commentary

The reiteration of Labour’s long-held aim of removing the VAT exemption for private school education is unsurprising and there is much debate on how this may impact the sector.  At a basic level, the removal of the exemption will mean that private schools will need to add 20% VAT onto their fees. While private schools will be able to offset some of the impact by recovering VAT on costs, this is expected to be limited, given that staff costs normally represent by far the biggest item of expenditure. According to a survey of schools, after taking into account cost reductions and the recovery of input VAT, fees are expected to rise by 16% on average, but some schools may not be able to reduce costs and so will need to pass on the full 20% increase to parents and guardians.

While it is expected that Labour will look to maximise the extent to which VAT is applied to the range of education services provided by private schools, it is not clear whether or not the proposed changes to the legislation will also impact ‘welfare services’, such as after-school care and nurseries provided by private schools.  The proposed changes will affect all private schools, and this is already having an impact with the number of children joining private schools dropping this academic year by the biggest proportion since 2011 when the Independent Schools Council began collecting data. You can read more on the changes ahead for private schools here.

On business rates, although the current Government was introducing some modernisations, Labour’s proposal to replace the current business rates system  is a radical change. The lack of clarity on a replacement to levy a similar revenue (revenue from business rates is currently about £30billion) leaves businesses unsure about future costs. The system is very likely to closely mirror the present property rental-based tax or a land value tax but just under a different name.

Significant input from key business rates specialists would be required through consultation to support the Government to make key changes for the better.

Labour have also announced that they would seek to remove business rates relief for private schools. This comes on top of the proposed changes to VAT. The removal of the current 80% relief would see business rates costs for schools who are charitable trusts rise by three times the amount currently paid. This would be a significant burden along with concerns around retaining students.

Manifesto pledges

Manifesto pledges on business tax policies include:

• Cap the main rate of corporation tax to the current level of 25%
• No increases to VAT rates
• End the VAT exemption for private school fees
• Remove the business rates relief for private schools
• Keep full expensing relief for capital expenditure
• Keep the annual investment allowance
• Improve guidance on what qualifies for capital allowances
• Publish a roadmap for business taxation
• Replace the business rates system
• Increase the energy profits levy by 3%
• Remove the investment allowances from the energy profits levy
• Reform the apprenticeship levy and create a more flexible growth and skills levy
• Support implementation of the OECD global minimum rate of corporation tax
• Support efforts to make international technology companies pay a “fair share” of tax

• Only one major fiscal event a year
• Every fiscal event that makes significant changes to taxation or spending will be subject to an independent Office for Budget Responsibility forecast
• Increase the rate of the stamp duty land tax surcharge for non-UK residents from 2% to 3%
• Tackle tax avoidance:
  • Push to recoup COVID-related fraud losses
  • Increase registration and reporting requirements
  • Strengthen HMRC’s powers
  • Invest in new technology
  • Build capacity within HMRC
  • Renew focus on tax avoidance by large businesses and the wealthy

You can read further insights on our Election hub, which also includes our Conservative/Labour manifesto comparison table.

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