By Mathew Gilbert, Head of Capstone’s European Practice

The last time the UK Labour Party was in government in 2010, Liam Byrne, the chief secretary to the Treasury under Gordon Brown, left a note for his successor, which simply said: ‘Dear chief secretary, I’m afraid to tell you there’s no money left.’ The note resembles a similar letter left by outgoing Tory Chancellor Reginald Maudling to Labour’s James Callaghan in 1964, reading, “Good luck, old cock … Sorry to leave it in such a mess.”

In 2024, Labour is widely expected to take power from the Conservative Party after 14 years, with  Prime Minister Rishi Sunak facing what appears to be an insurmountable task. Keir Starmer, the Labour Leader, has moved the party to the centre and has created a potent electoral force.

In the context of high-interest payments on debt and low economic growth, UK public finances are on an unsustainable path. This means that the next government will face difficult fiscal choices.

In the context of high-interest payments on debt and low economic growth, UK public finances are on an unsustainable path. This means that the next government will face difficult fiscal choices.

With the Conservatives so far behind in the opinion polls, in the most recent March 2024 Budget, Chancellor Jeremy Hunt again opted to loosen the fiscal purse strings by cutting taxes on household income. This followed fiscal loosening in the March 2023 Budget and the November 2023 Autumn Statement.

Our base case is for a UK election in October or November, and we believe the Treasury is working towards a September fiscal event. We expect him to use any “fiscal headroom” given to him by the Office for Budget Responsibility (OBR) to fund tax or further national insurance cuts, with a focus on “rewarding work and growing the economy.” The Chancellor has hinted at a pre-election Autumn Statement, offering the Tories one final chance to win over voters.

The next government will need to raise revenue. If the Labour Party wins as expected, they will face an undeniable reality: taxes must increase to pay for the soaring demands on the NHS and other public services.

Political stereotypes suggest Labour will take an aggressive “tax and spend” approach. However, Starmer and Shadow Chancellor Rachel Reeves have taken great pains to appeal to the corporate world as a safe pair of hands, including capping corporation tax at 25%. We have heard a lot about what Labour won’t do. The leadership said they do not have plans to increase income taxes and the Shadow Chancellor emphasised that she “didn’t come into politics to raise taxes on working people.”

The next government will need to raise revenue. If the Labour Party wins as expected, they will face an undeniable reality: taxes must increase to pay for the soaring demands on the NHS and other public services.

On the spending front, uncertainty over the fiscal outlook has forced Labour to water down its green investment plan. It now plans to spend £23.7 billion over a five-year parliamentary term, amounting to ~£4.7 billion a year. This is a substantial reduction from its pledge of £28 billion annually. On borrowing, Reeves is also committed to balancing the day-to-day budget. The official manifesto will only be produced after the election has been called. However, we have several indications of what Labour will include on the tax policy front:

• Windfall taxes – Energy, Banks, and Big Tech? Labour intends to make changes to the Energy Profits Levy (EPL), the ‘temporary windfall tax’ introduced in 2022 and currently charged on profits at 35% as part of a headline tax rate of 75%. The proposal is to increase the levy to 38%, taking the headline tax rate from 75% to 78%. Jeremy Hunt adopted Labour’s policy to extend the EPL to March 2029, but the rate was not changed. The actual tax companies pay will depend on how much the burden is offset through the Investment Allowance. Labour has called this a “Loophole” and could remove some of the investment incentives. Bank taxes are back in vogue in Europe. Last year we saw changes or threats of changes in Spain, the Netherlands, Sweden, and Italy. The UK government currently has a bank levy on the UK balance sheet of banks and a banking sector surcharge (additional 3% tax rate), resulting in a total corporation tax rate of 28% for banks in 2023. The government cut the bank surcharge from 8% in 2022 to partially offset the incoming Corporation Tax rise. At the time, we believe the Labour leadership were against the reduction. Although we wouldn’t entirely rule out a higher tax burden on banks, with Reeves looking to charm the City, we don’t believe a new bank-focused windfall tax is currently a Labour priority. Reeves also mentioned that she would make “tech giants pay their fair share” of tax. Labour has abandoned its plans to increase the digital services tax (DST) from 2% to 12%. However, the party’s national policy forum (NPF) said last summer: “Labour wants to shift the burden of business tax away from high streets, small and medium-sized enterprises and investment towards online tech giants and multinationals.” Although, we don’t believe this will be easy policy to implement, the Labour manifesto could include measures to shift the burden of business rates away from the high street and towards big tech companies such as Amazon.

• VAT for Private Schools. Based on the UK Charities Act, the advancement of education is deemed a charitable purpose. Schools with charitable status are eligible for several tax exemptions, including value-added tax (VAT) exemption on the fees they charge and business rates relief. The Labour Party has been vocal about its plan to roll back the benefits enjoyed by private schools for years, specifically charitable status and tax breaks, to fund free school meals for all primary school children. More recently, Labour indicated that if it comes to power, private schools may be able to retain their charitable status and some of their advantages, with only the VAT and business rates exemptions being removed. If Labour adds 20% VAT to independent school fees, this will raise an estimated £1.6 billion. Private schools have been looking for ways to mitigate the impact of the potential VAT increase, for example, suggesting fees for boarding could be exempt from the VAT charge or through advance payment schemes. However, our understanding is Labour Party officials will look to close perceived loopholes.

• Taxation of carried interest. Labour has for several years talked about its plans to abolish what they describe as the carried interest “loophole” (receipt of carried interest as capital attracting a 28% rate rather than an income tax at a rate of 45%). However, this did not feature heavily in Conference speeches it was one of the policies contained in the NPF Policy Document and was recently repeated by the Shadow Chancellor in April 2024. However, there has been increasing push-back from the private equity industry that such a move would impact the UK’s attractiveness for funds and damage the economy. In France, Italy, and Germany, taxing carry ranges from 26% to 34%. In March 2024, the Treasury published an opposition policy costing document on Labour’s carried-interest policy, stating that it would cost the Exchequer £3.3 billion over the life of the next Parliament. The shadow chancellor is facing pressure to water down the proposal, which could imply an increased rate but below the higher 45% income tax rate.

It is not a secret that Labour will want to raise money from those that have the most money. This will mean policies that seek to reform a tax system that is perceived to benefit the wealthy, either individuals or companies.

• Wealth and pensions-related taxes. It is not a secret that Labour will want to raise money from those that have the most money. This will mean policies that seek to reform a tax system that is perceived to benefit the wealthy, either individuals or companies, including the proposals to reform the non-domicile (non-dom) tax regime, the reintroduction of the Pensions Lifetime Allowance, and the stamp duty surcharge for overseas property owners. Jeremy Hunt, announced in the March Budget that the favourable tax regime for non-doms will be abolished and replaced with a new regime from 6 April 2025, copying a Labour policy. The conservatives left open a carve-out that allowed non-doms who will lose benefits from April 2025 to shield foreign assets held in a trust from inheritance tax permanently. Reeves recently targeted this carve-out, given Labour has been forced to rethink its flagship non-dom proposals, which it had previously said would raise £2 billion of revenue partly to support the NHS. We believe a broader tax on the ownership of net wealth is unlikely. While prior Labour Party leaders supported it, and it has strong support among many senior MPs and the broader voting public, we believe the party leadership currently does not have plans to introduce one. Equalising capital gains tax (CGT) and income tax holds strong support within the party, with Deputy Leader Angela Rayner reportedly pushing to increase CGT in the manifesto. However, in March, Reeves said Labour has “no plans” to raise capital gains tax. If a rise is implemented, we believe it will be moderate (rather than fully equalised with income tax). We believe targeting pensions tax relief for higher earners could be a way for Labour to raise revenue based on the argument those in the 40% tax bracket get twice as much gifted by the state as those on 20%. The tax rate could be equalised somewhere between 20-40%.

• Broader corporate tax regime. There appear to be more limited differences between the two political parties on tax policy for companies. As mentioned above, Labour has no plans to raise the headline corporation tax. However, Reeves has committed to reviewing the UK business tax system, with reports that Labour has identified £4 billion in tax reliefs that are under threat. Our understanding is Labour could also target share buybacks and dividends to encourage the re-investment of profits in businesses, as well as investment allowances.

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