Labour party tax policy (2024)

The state of the public finances will present a significant challenge for any government, let alone one that will face immediate pressure to increase public spending. The new government will also inherit the highest tax burden in post-war years leaving little political room for significant tax rises.

In any election campaign, the politics of the “tax and spend” narrative is crucial, but especially so for the Labour Party where one of their key aims is to pacify any concerns about their ability to manage the economy. The disciplined approach thus far has meant that spending commitments have been backed up by costed tax measures to demonstrate their fiscal responsibility. The discipline is likely to remain in place until the election, but once in office, further tax rises over and above the ones reported may well be needed if they want to balance the books and meet spending demands.

This note explores the business tax policies that the Labour Party have announced to date1and shares our thoughts on how the policies might be implemented in practice.

Carried interest

Rachel Reeves’ 2021 party conference launched the start of the Labour Party’s carried interest campaign. Since then, Labour spokespeople have referred frequently to “closing the loophole” but on occasions the language has been more revealing. Most recently, in July 2023, Rachel Reeves stated the party would treat “bonuses of private equity bosses as income rather than capital gains”2. The policy has also been directly linked to a spending pledge, with a promise to fund the recruitment of “thousands of new mental health professionals”.

Although the full details of the policy have not been articulated, an approach of taxing carried interest as earned income rather than as a capital gain would increase the headline rate from 28% to 47% (including NICs), unless some form of special income tax rate was introduced. A measure of this kind would make the UK significantly uncompetitive compared to other jurisdictions.

Rather than abolition, the Labour Party could instead pursue reforming the regime. Emulating the approaches of other European countries would reduce the competitive disadvantage the UK might face in light of full-scale elimination of the regime. The European regimes typically have more conditions attached meaning the regimes are more targeted and apply in a narrower set of circ*mstances than the UK’s existing rules. Conditions could include a holding period, a co-investment requirement or ensuring a proportion of the carried interest is taxed as remuneration. Some jurisdictions, such as France, have a slightly higher rate (34%), however it is lower than the French general earned income tax rate.

There is a healthy debate about how much tax revenue abolishing the carried interest regime would raise. If the carried interest rate was increased to 47% and there was no behavioural response, tax revenues would increase by around £646m per year (based on 2021 data)3. Another figure of £440m per year has been cited following research undertaken by Arun Advani and Andy Summershowever this is also a static calculation that does not take into account the behavioural effect (and is based on 2017 data).

A more accurate calculation of the Exchequer impact should consider the effect this policy would have on the migration of individuals. Threats to leave the UK often ring hollow in this kind of debate, but nevertheless, in costing this measure the Office for Budget Responsibility would expect the Government to include some level of dynamic effect in the policy costing. While difficult to put a precise number on it, it would be judicious to assume there will be some level of departures (and reduction in future arrivals) that would negate the potential revenue raised.

Unpublished HM Treasury analysis that was briefed to The Telegraph suggests scepticism about the amount that could be raised and estimates that abolishing the regime would have a detrimental effect for the Exchequer, costing £350m per year. Either way, the true effect will be impossible to predict. Reforming the regime, as opposed to abolishing it, might offer the safest way to raise some revenue.

Review of the UK business tax regime

Rachel Reeves has committed the Labour Party to undertake a review of the UK business tax system, to provide more certainty and boost investment. It is unclear whether the fruits of this review will be published before the general election or not, however it will culminate in the party publishing a roadmap that will last over the parliament. Nevertheless, work is clearly underway following reports in The Times that Labour have identified £4bn tax reliefs that are under threat. As well as the review of tax reliefs, we understand the party is also targeting share buybacks and dividend payments to encourage the re-investment of profits in businesses and investment allowances.

Crack down on tax evasion and tax avoidance

During the Corbyn era, the Labour Party published a standalone tax programme setting out detailed and costed plans to combat tax avoidance and evasion ahead of the 2017 and 2019 elections. This was largely a mechanism to bolster estimated tax receipts and the perception of fiscal competence given the high levels of proposed public spending. The level of detail is unlikely to be replicated again, not least because levels of spending pledged by the Labour Party are likely to be more restrained this time around. That said, some of the measures may still inform the approach taken by the Labour Party if they take office.

At this stage, it is unclear what the “crack down” will encompass, yet one policy that appears to be gaining traction within the Labour Party is making the tender for public contracts contingent on companies demonstrating good tax practices. At the 2022 Labour Party conference, it was announced that they would introduce greater corporate tax transparency before public procurement contracts are awarded.

It is widely expected that the Labour Party will introduce public country-by-country reporting for large multinational companies7, however this could be extended to a wider range of businesses that bid for public procurement contracts. New tax standards could also be introduced such as restricting the ability for companies to bid for public contract that are registered in tax havens and / or that use offshore trusts. A written question tabled by Angela Rayner on whether the Government was monitoring the profits made by public procurement suppliers that accrue to offshore trusts provides a hint that the Labour Party are contemplating some action here.

On a similar theme, the Labour Party have also said they would require “all care providers to demonstrate financial sustainability and responsible tax practices”. In an interview with the FT, Wes Streeting expanded on this and said private equity backed care providers would need to show they have paid “their fair share” of tax and would need to be more transparent. This underlines the Labour Party’s desire to introduce a values-led approach to the award of public contracts with the likelihood that companies not meeting the definition of a “responsible taxpayer” would be disqualified from bidding. It may also indicate a broader shift in industrial policy with a Labour government not only willing to scrutinise the private-sector’s role in public-sector supply chains, but also take a more hostile approach to private equity’s involvement.

Other policy measures that have featured under this heading in previous years include tackling IR35 and disguised employment; abolishing the quoted Eurobond exemption; a strengthened public register of beneficial owners of companies; and funding additional resources for HMRC. It is likely these policies will be rolled out again, especially if they can be demonstrated to raise revenue.

Increase and extend the windfall tax on oil and gas firms...but not on banks

Scrap and replace the current system of business rates

The proposal to scrap the current business rates system in England and Wales is an impressive statement of intent by the Labour Party and one welcomed by businesses of varying sizes and sectors given the level of dissatisfaction with the tax. The missing piece with this policy announcement is what the replacement business property tax will look like.

The closest we have to understanding what this will entail is a combination of Rachel Reeves’ original announcementand a more recent Westminster Hall debate involving James Murray. Some of the features of the new system are said to include:

On first cut, the underlying framework is not too dissimilar from the existing system. However, there are some reports that the Labour Party plans to shift the burden of the tax from the business (the tenant) to the landlord (which was a policy in the 2019 manifesto). In the short-term this policy will appeal to businesses, particularly tenanted properties on the high street, but in the medium to long-term, shifting the burden to the landlord is unlikely to generate a material saving for businesses, as rents will adjust accordingly.

The downside for businesses is not limited to the fact that landlords will pass on the business rates charge through higher rents, but tenants will not have the ability to appeal the amount that is passed on through higher rents, unlike in the current business rates system. Collection authorities will also face difficulties. Determining the level at which the charge is imposed (whether on the freeholder, head leaseholder or sub-leaseholder) will be one such challenge, but even the straightforward task of identifying who the owner is may prove problematic given that the UK does not hold a complete central register of ownership interests in land.

Another option that is often mooted with business rates reform is replacing it with a land value tax. Again, this proposal was put forward as an idea to be considered in the Labour Party’s 2019 manifesto and has endorsem*nt from the influential IFS. A land value tax is different from business rates as rather than taxing the value of the property built on the land, the value of the bare land is subject to tax. One of the key advantages of a land value tax is that it does not penalise investment in a property and given the Labour Party wants to incentivise investment this might be an attractive solution. Whilst on paper a land value tax is an attractive proposal, the practicalities of implementation (in particular, accurate valuations of bare land) mean it might be more difficult to implement in practice.

A new government may find fundamental reform of the business rates system easier said than done. Business rates typically raises around £25bn after reliefs in England each year and from a government perspective is viewed as an easy tax to collect that suffers little from evasion and avoidance. Therefore, despite the claims that the tax will be scrapped, the replacement is unlikely to be vastly dissimilar in operation even if it is in name.

Digital services tax increase abandoned

The Labour Party has abandoned its plans to increase the digital services tax (DST) from 2% to 12%. When the policy was first announced at the 2021 Labour Party conference, Rachel Reeves called on the Government to freeze business rates during 2022-23 and proposed funding this by an increase in the DST.

A subsequent policy announcementreferred only to a temporary increase in the DST perhaps acknowledging the difficulties the measure would impose in the longer-term, not only negating the ongoing global efforts to introduce a new profit allocation to market jurisdictions (known as Pillar 1) but also inflaming relations with the US who would see the significant hike in the DST rate (to one of the highest globally) as cause to impose trade tariffs.

Notwithstanding this policy reversal (if you can call it that), online companies can still expect to be in the firing line given the party has underlined its desire to shift the burden of business rates away from the high street to online giants.

Published on: 29/09/2023

¹ This is based on the leaked policy platform published by Labour List (11 May 2023) and other high-profile interventions / announcements in the media.

² Channel 4 interview (12 July 2023)

³ FOIA filed by Macfarlanes LLP asked HMRC to provide information on the amount of carried interest reported in tax returns for the 2020-21 tax year.

⁴ The main rate is currently set at 25% and is expected to remain stable under a Labour government who have said the rate will remain in lockstep with the G7.

⁵ For example, in 2019 Labour's Review of corporate tax reliefs was published.

⁶ Start-up, Scale-up review, December 2022

⁷ Angela Rayner tabled a written question to the Chancellor on 28 November 2022 on this subject.

⁸ In line with Norway’s effective tax rate of 78% when taking into account the UK’s ring fence corporation tax (30%), supplementary charge (10%) and energy profits levy (if increased to 38%).