General Election 2024: Liberal Democrat Tax Policy

While the Liberal Democrats are currently considered unlikely to form the next Government, their tax pledges could influence the policy ideas of a future Government, or even a coalition. We consider the tax pledges contained in their manifesto below.

The Lib Dems are looking to “build a strong, fair economy that benefits everyone in the UK, by helping people back to work, supporting small businesses, improving long-term productivity, and delivering much greater stability for long-term investment”, and their tax policies are focussed on businesses.

While there are no proposals to change corporation tax itself, there are proposals to increase the bank levy and bank surcharge rates. It is thought that this is following the 2023 cut in the bank surcharge from 8% to 3%, although this cut was introduced to reflect the increase in the headline corporation tax rate from 19% to 25%, with banks still paying tax at 28% overall.

The manifesto pledges on business taxes include:

• Increase the bank levy and the bank surcharge so that revenues return to 2016 levels “in real terms”
• Increase the Digital Services Tax on social media and other technology companies from a rate of 2% to 6%
• Introduce a new ‘share buyback tax’. This would be at a rate of 4% on share buyback schemes, for companies listed in the FTSE 100.
• Cooperate with the OECD and UN in tackling international corporate tax issues, and make the case for increasing the level at which the global minimum rate of corporation tax is set to 21% from its current level of 15%
• Scrap VAT on children’s toothbrushes and toothpaste
• Review further education funding, including the option of exempting colleges from VAT
• Cut VAT on public charging of electric vehicles to 5%
• Introduce a new levy on tobacco company profits, with an inbuilt anti-avoidance mechanism

New taxes are the theme of the environmental tax policies. Environmental taxes are effective when they are aimed at undesirable behaviour and the taxpayer has an alternative behaviour to adopt. A new ‘sewage tax’ has been proposed. To be effective it would need to be structured and tailored at the offending behaviour so that the worst offenders pay more, rather than being profit linked.

Manifesto pledges on environmental taxes include:

• Impose a ‘proper’ one-off windfall tax on the ‘super-profits’ of oil and gas producers and traders. Scrap the “investment allowance loophole”, increase the headline rate and extend it to profits since October 2021 when Liberal Democrats first called for its introduction
• Introduce a ‘sewage tax’ on water company profits - apply an additional 16% tax to water company profits
• Reform the taxation of international flights, targeting those who fly the most and reducing the amount paid by households taking one or two international return flights a year
• Implement a new super tax on private jet flights, and remove VAT exemptions for private, first class, and business class flights

The most significant changes proposed are to CGT, with rates being increased to similar rates to those applying to income tax. There has been talk for some time around an increase in capital gains tax rates given the disparity between the current rates of income tax and capital gains tax, so it is perhaps not a surprise to see this making it into a party manifesto. However, there is always a question around how much additional revenue this would raise given taxpayers often accelerate disposals to before the rate changes or delay any sales hoping for a reduction in rates. In addition, the different regimes have been partly justified by the different ways in which income and gains arise. For example, gains can be a one-off, from a long held asset and this was previously recognised until 2008 through ‘taper relief’.

Overall, reintroduction of an inflation allowance would however be welcomed, as would a reintroduction of a more sensible rate of annual allowance which, if nothing else, would ease the administrative burden for many taxpayers.

Proposals to add a new employment status of ‘dependent contractor’ may introduce more complexity, particularly as it is unclear how the proposed new status would interact with existing 'worker' status, currently sitting between employed and self-employed statuses.  In our view, a clear statutory basis to determine status would be more welcome to introduce clarity to this complex area.

Manifesto pledges on personal tax policies include:

• Reform CGT. A supplementary report explains the changes planned:
  • Move to a system of three rates. 20% up to £50,000 of gains, 40% between £50,000 and £100,000, and 45% over £100,000. The rate bands would be independent from income levels
  • Increase the CGT tax free allowance to £5,000 a year
  • Introduce an allowance for inflation
  • Create a targeted relief for small businesses
• Cut income tax by raising the personal allowance, but only when the public finances allow
• Establish a new ‘dependent contractor’ employment status, in between employment and self-employment
• Review the differential tax and national insurance treatment of employees, the self-employed, and dependent contractors and freelancers. The aim being to ensure a fair and comparable treatment
• Review the reforms to off-payroll working (IR35) to ensure that the self-employed are being treated fairly

• End retrospective tax changes such as the loan charge
• Tackle tax avoidance and evasion, by investing an extra £1 billion a year in HMRC to improve customer support and boost compliance and anti-avoidance activities

https://www.libdems.org.uk/manifesto

https://www.libdems.org.uk/news/article/fairly-reforming-capital-gains-tax-to-save-our-nhs

https://www.libdems.org.uk/sums

Approval code: NTEH70624102