What tax measures could be expected under a Labour government
by Erika Jupe and Tracey Wright, partners at Osborne Clarke in Bristol
Shadow Chancellor Rachel Reeves set out her tax priorities at the recent Labour Party conference.
She stressed her reluctance to increase taxes for “working people” and said she would instead focus on closing “tax loopholes”, ensuring that the wealthiest individuals and businesses “pay their fair share.” Private schools, non-domiciled individuals, overseas purchasers of property and multinational giants were specifically identified as key targets for reform.
VAT and business rates on private schools
Rachel Reeves promised to use her first budget as chancellor to "end the tax loophole which exempts private schools from VAT and business rates.” Private schools currently have charitable status in the UK, meaning that they are eligible for tax exemptions on donations and from business rates. Supplies of education are also specifically exempt from VAT.
This announcement has appeared consistently in previous statements. Labour’s original intention appeared to be to strip private schools of their charitable status with leader Sir Keir Starmer saying the status "could not be justified.”
However, last month Labour suggested that the tax breaks can be addressed without removing charitable status. This could be achieved by excluding private schools from the definition of “eligible body” in VATA 1994 Sch 9 Group 6 Note (1). The supply of education by an eligible body is exempt from VAT.
Abolish non-dom tax status
Another significant tax announcement signalled by Rachel Reeves was the proposal to abolish the tax status for “non-doms” and replace it with “a system for genuinely temporary residents.” This has been a consistent policy since appearing in Labour’s 2019 manifesto.
Currently, UK resident but non-domiciled individuals can defer UK tax on their non-UK income and non-UK gains until they "remit" these amounts to the UK. As long as the income and gains remain outside the UK, they are not subject to UK tax. The taxpayer must elect into the regime and certain long-term residents must pay a fee to use the regime.
Rachel Reeves gave no indication of what a replacement regime for genuinely temporary residents might look like. Careful consideration will be needed.
For example, if non-dom status is abolished, the entire gain realised on the sale of a non-UK asset could be subject to UK tax even though some of the gain may have accrued years before the seller came to live in the UK. There are also other wider ramifications to consider when introducing such a policy, such as the risk of non-doms emigrating from the UK in large numbers if the preferential tax regime is abolished.
SDLT rise for overseas purchasers
As part of Labour’s aim to be “the party of home ownership”, the shadow chancellor confirmed plans to build more homes and “make 70 per cent of British households homeowners”, with funds raised through an increase in the Stamp Duty Land Tax (SDLT) surcharge for overseas property owners.
Currently, a 2 per cent SDLT surcharge applies on purchases of residential property in England and Northern Ireland by non-UK resident buyers. The proposals are to increase this, although there is currently no indication of the amount of this increase.
“Online tech giants to pay their fair share”
Rachel Reeves also mentioned that Labour would support small businesses by “requiring online tech giants to pay their fair share.”
There was no further detail on this, although it suggests an intention to continue to support the implementation of the two-pillar approach of the Organisation for Economic Co-operation and Development, which aims to reallocate profits of those large multinationals to jurisdictions where value is created (without a physical presence) and the introduction of a global minimum rate of corporate tax. This may also signal an intention to change the business rates system to protect “bricks and mortar” businesses.
Windfall tax on energy super profits
She also pledged to levy a “proper windfall tax” on the profits of energy giants. Labour has publicly stated that the current Energy Profits Levy introduced last year does not go far enough - however, no specific details were given on what a “proper” windfall tax might look like.
Taxation of carried interest
Although not specifically mentioned at the party conference, Labour has publicly committed to addressing another perceived tax loophole – the taxation of carried interest as capital attracting tax at 28 per cent rather than as income at a rate of 45 per cent for the highest earners.
There has been considerable speculation in recent months on the validity of the current technical basis for taxing carried interest and what measures Labour would introduce to increase tax – whether that is a simple increase in the rates of tax of carried interest or a more technical change.
A key consideration will be the potential wider impact of any tax changes on the UK funds and private equity industry and the overall attractiveness of the UK as a destination for inbound investment.
Other measures
During the party conference, the shadow chancellor again stressed the importance of having preferential tax treatment to make the UK the best place to start and grow a business.
This supports Labour's proposals in its “Start-up, Scale-up” policy paper which suggests that Labour would expand existing incentives, such as the SEIS (Seed Enterprise Investment Scheme) and the EIS (Enterprise Investment Scheme) and the R&D tax credit system. We suspect that such plans are unlikely to involve improvements to the current business asset disposal relief (BADR) – formerly known as entrepreneurs' relief – which both Labour and the Conservatives suggested would be reformed.
What Labour has previously ruled out
While nothing is certain in politics, Labour has previously stated there will be:
No wealth tax
No increase in the rate of capital gains tax (CGT), but a Labour government may look to change CGT exemptions and/or reliefs instead (such as Business Asset Disposal Relief)
No increase to the top rate (45 per cent) of income tax, although no mention has been made of any changes in thresholds which can obviously impact the tax take
Rachel Reeves used her party conference speech to stress Labour’s commitment to closing perceived tax loopholes and ensuring the wealthiest pay their fair share of tax.
Beyond this, however, there was little detail around broader fiscal policy other than a commitment to “tax fairly and spend wisely.” It remains to be seen how general tax policy would be used to fulfil her “securonomics” vision.
