Bull: what does a change of government mean for tax?

With Parliament fractured over Brexit, a general election and a potential change in government could follow. George Bull, senior tax partner at RSM considers the possible tax changes under a Jeremy Corbyn government

Labour’s publicised policy on taxation has not changed substantially from their 2017 manifesto, although hints of further radical changes to the tax system were alluded to at the last Labour conference. 

In any snap election, we might expect the key policies from the 2017 manifesto to be recycled rather than ripped up, so it is worth revisiting these.

Manifesto pledges 2017

The key themes of Labour’s tax policy in their 2017 manifesto were two-fold. First, to raise taxes for large companies and for the top 5% of individuals. Second, to raise further tax revenues by tackling tax avoidance. As John McDonnell, Shadow Chancellor of the Exchequer, put it in his 2018 conference speech, ‘fair warning to the tax avoiders, we are coming for you’.

From an individual perspective, the key headlines were for the 45% income tax rate to apply to those with income over £80,000 and a further 50% income tax rate to apply to income over £123,000. Other policies included introducing VAT on private school fees and a wide-ranging review of business reliefs and structures, such as trusts. While the specifics are vague it would not be a surprise for entrepreneurs’ relief and business property relief to come under the spotlight again.

From a company perspective, as it stands, corporation tax is at 19% and is expected to reduce further to 17% from 2020, the lowest rate among the G20 countries. Under Labour’s manifesto proposals, the headline corporation tax rates are expected to increase in stages, initially to 21% followed by increases to 24% and 26% in subsequent years. This will not apply to all companies and a corporation tax of 21% is the ultimate target for smaller companies with profits below £300,000.

In relation to tackling tax avoidance, Labour has incorporations of companies in their sights. Even with the proposed increases in tax rates, there would still be a substantial difference between corporation and income tax rates and the manifesto notes ‘there is now a clear tax incentive for individuals to self-incorporate’. What is not clear is how any ’false incorporations’ would be identified and tackled from a practical perspective.

Other changes and predictions

A big announcement in the last Labour conference was the proposal for larger corporates to transfer up to 10% of its shares to an ‘inclusive ownership fund’. Those shares would be held by employees and they would therefore share in the dividends paid, up to an amount of £500 per person. Any dividends paid to the fund over that amount will go to the Treasury as a ‘social dividend’ to fund the ’collective investment in infrastructure, education and research and development that we as a society make that enables entrepreneurs to build and grow their businesses’.

Beyond that announcement, perhaps the strongest indication of where Labour tax policy is heading can be found in the recommendations of the Institute of Public Policy Research (IPRR) in their report: Prosperity and Justice: A Plan for the New Economy.

The report sets out a ten-part plan for reforming the economy and some significant tax changes are suggested as part of this, including:

  • reforming income tax and NIC into a single tax that is applied to all income;
  • abolishing income tax bands altogether in favour of a formula-based system so the tax rate rises in a smooth curve as income rises;
  • income and gains to be subject to the same tax, so no more Capital Gains Tax (CGT) or different tax rates for dividends;
  • CGT exemptions to be scrapped apart from the exemption for your main home;
  • inheritance tax to be abolished and replaced with a lifetime gifts tax on the recipient.

Whilst the IPPR recommendations are not formal Labour policy at this stage, the report received effusive praise from McDonnell at the time who commented it ‘could transform our approach to economic policy making’. It might be too soon for such dramatic changes to be incorporated into a snap election manifesto, but it gives a strong hint to the direction of travel under a Labour government.

About the author

George Bull is senior tax partner at RSM

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