Heather Self, Partner – Corporate Tax
Anti-avoidance
“Labour’s fair tax programme, tackling tax avoidance and evasion, is predicted to raise £6.2bn – more than the Lib Dems’ figure of £5.7bn, and likely to be equally difficult to turn into hard cash.
“Successive governments have introduced a raft of anti-avoidance measures, so that the avoidance tax gap is now only £1.8bn according to HMRC’s figures. The estimated evasion in 2017-18 was a further £5.3bn, but while it’s entirely appropriate to seek to collect more tax in these areas, the practical challenges should not be underestimated.”
Unitary taxation of multinationals
“Labour say that they will raise £6.3bn from unitary taxation of multinationals, but this will be impossibly complex and requires agreement of more than 100 countries. It’s even possible that the UK could lose out, rather than gain, from unitary taxation, as although we may collect more from foreign multinationals, we will have to abide by the same rules for UK companies trading overseas.”
Corporate tax reliefs
“Labour’s proposed review of corporate tax reliefs is welcome in principle, as it will give a more rigorous analysis of costs and benefits than exists at present. However, the proposed revenue to be raised of £4.3bn, while amounting to only around 1% of total reliefs, is a much higher proportion of corporate tax reliefs – the total corporation tax relief estimated for 2019-20 is £25bn – implying some significant tax rises for business”
Andrew Sanford, Partner – Audit, Assurance & Advisory
VAT
“Applying VAT on private school fees will enable them to recover input VAT on large capital expenditure. This does not appear to be considered in their calculations.”
R&D and Capital Gains Tax
“Each tax raise is considered in isolation. There is also a cumulative effect. For a tech entrepreneur, these pledges are a disaster. The reduction in R&D tax relief is bad enough but withdrawing the Capital Gains Tax rate incentives will render share options useless, meaning that the entrepreneur will be unable to attract tech talent that is highly mobile. With such draconian measures, these highly mobile companies will simply relocate.”
Tax raising measures
“Labour have committed to new tax raising measures of £76.7bn against £31.3bn for the Lib Dems. The scale of these tax rises is unprecedented for at least a generation. With labour and capital being highly mobile, and less restricted to a specific location, this is a massively high risk strategy.”
With labour and capital being highly mobile, and less restricted to a specific location, this is a massively high risk strategy.
Genevieve Morris, Partner – Corporate Tax
Corporation Tax
“Really disappointing, but not surprising that Labour propose to increase Corporation Tax to 26% by April 2022. They don’t seem to appreciate how beneficial the attractive Corporation Tax rate has been to encourage inward investment in to the UK, which then creates jobs and contributes through employers national insurance. Corbyn hinted at this in the live debate earlier this week but I wonder if he’s considered how the increase in tax rate may impact on employment and inward investment. I suspect the only winner will be Ireland.
“I’m pleased to see that they at least propose to reintroduce a small profits rate for businesses with turnover less than £300k. Although this rate of tax would still be higher than the current rate of corporation tax (or that proposed by the Lib Dems), meaning smaller businesses do not escape unscathed, it will certainly soften the blow a little.
“A comprehensive review of corporation tax reliefs is welcomed and needed. The system is over complicated, and simplification is required.
“However, it’s clear that the review will result in the abolition of many targeted tax reliefs which were introduced to attract businesses to establish in the UK and to encourage innovation and development in the UK. This (along with the increase in corporate tax rates) will result in a slowdown of inward investment to the UK and an increase in competitiveness from other countries across the EU.”
R&D reliefs
“Abolishing R&D reliefs for large companies will encourage them to look at alternative locations for development where costs are lower and R&D tax reliefs are available. This will result in jobs lost and a reduction in productivity in the UK and reduce tax as the workforce shrinks.”
Tax avoidance
“Labour may want to tackle the perceived avoidance of taxation by multinational businesses and change the entire system of how profits of multinational corporations are allocated across the group, but this would require renegotiation of all the UK tax treaties which presently take priority over UK domestic law. It’s not as simple as just changing the law but would require all other parties to those tax treaties to agree to the change. That’s not something that’s going to happen overnight, so the suggested income is likely to be wildly over estimated.
“Labour is targeting the businesses heavily to fund their spending plans. such a shame they don’t appreciate that these large businesses and multinational companies that they seem to despise are responsible to keeping thousands of UK workers in employment, not to mention their contribution to UK tax through employers national insurance. Labour should embrace business, encourage innovation and entrepreneurship as its these companies and the businesses of the future that will fund the country.”
Alan Pearce, Partner – VAT
VAT on private school fees
“Are Labour forgetting that in order to impose VAT on private school fees, the UK would first need to leave the EU? They won’t be able to deliver on this promise if they have a second referendum on Brexit and the decision to leave is reversed.”
Nimesh Shah, Partner – Private Client
Entrepreneurs Relief
“Labour’s manifesto pledges to abolish entrepreneurs’ relief – this is the 10% rate of capital gains tax that applies when an individual sells their business. The relief is subject to a lifetime cap of £10 million, and under the current tax rates, is worth up to £1 million.
“In a further step, Labour would align the rates of income tax and capital gains tax. Whilst Labour’s manifesto is silent on whether the 50% income tax rate would be re-introduced, there have been previous suggestions that there would be.
“Therefore, a business owner selling their business under this proposed regime could see a five fold increase in their tax rate, meaning half of the proceeds being taxed.
“There have been recent growing calls to abolish entrepreneurs’ relief, most notably by the Institute of Fiscal Studies.
“Entrepreneurs’ relief is one of the most valuable and talked-about reliefs amongst the UK’s business community, and early-stage entrepreneurs’ are greatly incentivised to set up businesses, with the hope that the business can be sold in the future and the founder can benefit from a lower rate of tax. The lower rate of tax acknowledges the risk and effort invested by the founder in their business, as well as the contributing factors on employment, corporate taxes, VAT, etc. It therefore appears a sledgehammer to abolish the current regime in its entirety.
“Scrapping entrepreneurs’ relief also affects employees who have qualified share options (commonly under the Enterprise Management Incentive), as these can also benefit from the lower rate of tax. Holding such share options and benefiting from a lower rate of tax recognises that these employees may have received lower salaries as the business was not able to pay the cash sums in the earlier years. Such a change would have much wider impact than first believed.
“With the UK considered one of the leading communities for business owners and entrepreneurs in the world, abolishing this valuable relief would have much greater impact economically than generating a relatively modest sum for the Government.”
Corporation Tax
“Labour’s manifesto estimates a large majority of its tax revenue raising measures will come from UK businesses.
“The corporate tax rate will be gradually increased to 26%. Crucially, this higher corporate tax rate will apply to businesses with turnover above £300,000 – therefore, whilst a company may make modest profit, a turnover over £300,000 would push them into the higher tax rate.
Dividend tax rates
“Business owners wanting to extract monies from their companies will also be faced with higher taxes, as Labour proposes to align the dividend tax rates to the normal rate of income tax. Under the current system, the dividend tax rates are lower, but that recognises the corporate tax paid by the company. Under the Labour proposal, taking dividends is likely to result in a much higher tax charge than taking a salary, which should attract a deduction to calculate the corporate tax profits.
“Business owners may face an effective rate of tax of over 60% on their profits and subsequently taking money out of their companies.
“Finally, those business owners looking at selling their business could be faced with a 50% tax rate on the proceeds they receive, as the Labour manifesto suggests abolishing the 10% entrepreneurs’ relief and aligning the capital gains tax rates to income tax rates – whilst it’s not explicitly mentioned in Labour’s manifesto, the suggestion is that Labour would re-introduce the 50% income tax rate for income (and now capital gains) above 50%.”
Robert Salter – Global Mobility:
“The reduction in the additional rate tax to people earning over £80,000 and the introduction of a new 50% tax rate for earnings of over £125,000 tax band would mean many individuals in this band could face an effective tax bill of 67.5% because of the withdrawal of the personal allowance. In addition, such earners, who would typically not regard themselves as “wealthy” would usually face an additional 2% NIC surcharge liability on their employment income making the effective, marginal tax liability in many cases 69.5%”.
Capital Gains
“The proposal to treat capital gains earnings as “regular income” in the Labour Party Manifesto could result in many more individuals having to file annual tax returns. It is questionable whether HMRC would actually have the resources to deal effectively with such additional cases, given the struggles that it already has to provide a timely and efficient service to taxpayers.”
“The proposal to tax capital gains as regular income could undermine the attractiveness of the UK as a location for high-tech start-up businesses. Many such businesses, which often take a number of years to become profitable, have traditionally attracted the appropriate talent by combining relatively low salaries with employee share awards (which are often subject to capital gains tax treatment), to help manage their cash flow in the early, start-up years. However, if capital gains are to be taxed in the same way (and at the same rate) as regular earnings, it is questionable whether such start-ups will be able to find people willing to accept the low(ish) salaries that they presently have on a going forward basis.”
Impact on businesses
“The Labour Party’s proposals to tax dividends at regular income tax rates, could be another “nail in the coffin” for small British businesses. The present system of taxing dividends (and a company’s underlying corporate profits), means that the overall tax burden on business income broadly matches the income tax which would be payable for unincorporated businesses. However, the labour plan could potentially result in the overall tax burden on limited companies being, in effect higher, than that on unincorporated businesses.”
“The Labour Party’s Manifesto would appear to increase the tax on businesses significantly. As such, it would appear to make the UK a much-less attractive place for Foreign Direct Investment and hence potentially undermines one of the cornerstones of UK economic success over the last 30-40 years.”
Excessive pay
“The Labour Party Manifesto includes a proposal to review excessive, executive pay and potentially impose a levy on companies held to be paying executives excessively. Such a move would appear to be a threat to London’s centre as a hub for banking, Fintech and private equity. However, it is worth noting that other countries which have introduced “reforms” in this area – noticeably Switzerland, which voted over-whelming to restrict executive pay in a 2013 referendum – have actually had very limited success in controlling executive pay awards.”
VAT on school fees
“The claim in the Labour Party Manifesto that introducing VAT on school fees would result in additional taxes of ca. £1.5bn does not appear to take account of the fact that many families with children in private school are increasingly struggling to pay these fees – which have been rising consistently in real terms for a number of years. Adding 20% to school fees is only likely to drive many middle-class parents out of the private school system and thereby increase the pressure on already over-stretched state schools in many cases.”
Public sector pay rises
“The Labour Party’s proposed pay rises in the public sector could, unless they are matched with changes to the taxation of employee pension contributions (especially the taxation of defined benefit (final salary) pension schemes, such as those enjoyed by NHS employees)) could actually create additional staffing pressures for the NHS and similar bodies. Reports consistently show that many NHS consultants, for example, are either (A) retiring early, or (B) refusing to work overtime (despite real staffing pressures in Hospitals)), to avoid additional tax liabilities on their pension benefits. Increasing pay in the NHS without addressing the taxation of pensions (and pension contributions), will only exacerbate this problem.”
The proposal to tax capital gains as regular income could undermine the attractiveness of the UK as a location for high-tech start-up businesses
Jennifer McNally, Partner – Private Client:
“An observation on the impact of the income tax and corporate tax changes included in Labour’s manifesto – taking an example of £400K profit, where the entire profit is extracted by way of a dividend from a company, the effective rate of tax increases by 13% (50% under current rules and 63% under labour’s proposals).”
Simon Rothenberg, Senior Manager – Audit, Assurance & Advisory
Dividends
“For a business owner with a company which makes £400k profit in a year, the tax cost of taking these profits as dividends will increased from £199,444 to £252,000 as a result of the changes in the manifesto. This is as a result of the current tax rates on dividends being based on equalising (approximately) the salary and dividend route of business owners taking money out of the business. This increase in tax is, approximately, the cost of one employee per annum.
“In the manifesto launch, it was mentioned that there would be no impact for those who earn under £80k per annum – however the removal of the married persons allowance can only affect such people given the restrictions around the relief – increasing such couples tax bill by £250.”
Oil and gas windfall
“The Oil and Gas windfall tax of £11bn (which is not included in the costings) is to be recovered from companies based on their “past contributions to the climate crisis” – there is no detail around who would suffer this one-off tax nor how a Labour administration would calculate the past contributions of the companies.
“While the costings of the manifesto appear to be based on historical data, there is no (or little) allowance given for the combination of changes being announced – particularly those affecting corporate entities. These entities are impacted by a number of the measures announced and the interaction between these measures and the measures taxing the business owners are not considered in the costings. This is likely to result in a lower tax take.
“A number of the measures (including financial transactions tax, oil and gas windfall, efficiency review of corporate tax reliefs, Unitary taxation of multinationals, scraping of entrepreneurs reliefs and taxation of dividends at higher rates) are likely to influence business owners and entrepreneurs to consider whether the UK is the appropriate place for them to do business.”
VAT on private school fees
“VAT on private school fees has been costed based on historical increases in charges by schools – however it does not consider the magnitude of the increase that many working parents would suffer (a 20% increase in cost) and as such the uncertainty around both the tax generated by such a change and the increased cost to the state school sector of families who can no longer afford for their children to attend such schools is significant.”
Costings for additional borrowing
“One item not included in the manifesto costings or outlined in the manifesto itself is the significant level of additional borrowing a Labour government would require to create the publicly owned utilities, railway and broadband services along with the green and social transformation funds (together £400bn, or c £13,000 per tax payer in the UK) and the additional interest repayments this would require (at the current 10 year yield, this would be £3bn per annum for the transformation funds).
“While comments from the Labour party have suggested this interest could be repaid through the improvements the economy would experience, the manifesto costings are already including additional tax revenue from the fiscal multiplier of £5bn so it is hard to see from where the interest payments would be funded.”
Antje Forbrich, VAT Director – Corporate Tax:
“Labour do not want to increase VAT rate and recognise that VAT zero rating and VAT exemption constitute tax reliefs but do not include them in their proposed tax relief review. Interesting to see this in light of the UK’s impending departure from the EU as the UK’s ability of setting its own VAT rates was/is one of the repeated arguments in favour of leaving the EU.
“On the other hand, they do intend to remove the VAT exemption for private school fees although the main reason may not be fiscal. [Wonder whether private schools will challenge this as the EU VAT Directive provides for the exemption of school education by bodies governed by public law….or “by other organisations recognised by member states concerned as having similar objects”. It may hinge on the “recognised” because the UK may withdraw the schools’ charitable status”
For more information, please contact:
- Heather Self
- Andrew Sanford
- Genevieve Morris
- Alan Pearce
- Nimesh Shah
- Robert Salter
- Jennifer McNally
- Simon Rothenberg
- Antje Forbrich
Or for press comment, please contact David Barzilay.