UK General Election

They did diverge in a number of key ways, but both use the OBR March figures so do not need (yet) to face up to their post-election landscape. And both have significantly limited their room for manoeuvre by committing not to raise any of the rates of income tax, National Insurance or VAT, by a distance the three taxes raising the most revenue.  The fiscal shortfall is, it would seem, an elephant they would rather get to know after votes have been cast.

This economic landscape is in pretty stark contrast to this week's Tory manifesto. No new tax increases – instead we have £6bn raised by the old chestnut of "Tackling the Tax Gap" and £12bn in "welfare reform" (with a significant emphasis on disability and health condition benefits), all of which is being used to fund tax cuts (yes, despite all the above, we are in the run up to an election so cuts are the right answer) of £17.2bn per year by the end of the Parliament.  It is therefore unclear how the Conservative Party intends to  plug the significant fiscal funding shortfall that is expected to arise over the next few years, given the commitment not to raise the main taxes. One of the responses to the Conservative manifesto was from the IFS, which included the wonderfully expressed (and very loaded) comment that the Conservative pledges were "definite giveaways paid by uncertain, unspecific and apparently victimless savings."

The Labour Manifesto faired a little (but not much) better from the IFS' scorn:. And rightly so. A mixed bag of tax rises, but nothing really game-changing in revenue terms and more done through the Labour Party's prism of specific changes based on "loopholes" or fairness – additional tax from non-doms, VAT and business rates on private schools, windfall tax on oil and gas companies and changes to the taxation of carried interest – all already announced. The IFS' (cutting) view: "… almost nothing in the way of definite promises on spending despite Labour diagnosing deep-seated problems across child poverty, homelessness, higher education funding, adult social care, local government finances, pensions and much more besides. Definite promises though not to do things. Not to have debt rising at the end of the forecast. Not to increase tax on working people. Not to increase rates of income tax, National Insurance, VAT or corporation tax."  To be fair, our view is that there were other areas that were more encouraging, in particular the business tax roadmap, committing to greater certainty and consistency in business taxation and undertaking to fund HMRC more generously. But ultimately, as the IFS says, "Like the Conservatives and Liberal Democrats, Labour continues in a conspiracy of silence on the difficulties they would face".

The Tory Manifesto Launch on Tuesday 11 June

Key tax measures included in the manifesto

• Balancing the Tax Cuts - The measure intended to grab attention was the undeniably bold proposal to propose tax cuts (admittedly, spread over the Parliament – see below) funded by additional tax from cracking down on tax avoidance and evasion and by further pressure on welfare. Neither of these are, based on past experience, soft targets for raising revenue or reducing cost, so it is difficult to say with real certainty that these will generate the required results.
  
  
• NICs - The reduction of 2% in employee NICs is loosely timetabled. This is intended to be phased by a 1% reduction in April 2025 and a further 1% (taking it to 6%) in April 2027. Similarly, the abolition of self-employed NICs would be by 1% a year in each of 2025-2028 and the final 2% in 2029. As noted by various commentators, those changes (particularly to self-employed NIC) largely benefit the wealthier as fiscal drag (discussed below) absorbs the benefit for less high earners.
   
• Income Tax - There is a Manifesto commitment not to increase "the rate" of income tax, but it is perhaps telling that there is no promise that income tax will not be increasing for most people over the course of the next Parliament.  In March the OBR estimated that the continued freezing of personal tax allowances and thresholds (commonly known as 'fiscal drag') is expected to raise receipts of tax (mostly income tax) by an estimated £41.1 billion in 2028-29, which is roughly 4 times the Conservative Party's estimate of the value of the 2% cut to the rate of employee NICs (in 2028-29) announced in the Manifesto.  The Conservative Party Manifesto is unsurprisingly silent on these planned post-election tax rises, which have already been baked into the costings used for the Manifesto.
  
  
• Child Benefit - The changes to the HICBC ("high income child benefit charge") to move to a household income assessment were previously announced by Jeremy Hunt in the March Budget – so that is not new.  There will be some disappointment that the Manifesto proposals only soften the unfairness of the current rules, rather than setting out more meaningful reform.  It is also unclear how the move to a household income assessment of £120,000 would be effected in practice – there are significant technical challenges here that would need to be addressed, given that the tax system is not designed to work by reference to households in any other respect.
  
  
• Capital Gains Tax (CGT) – a commitment not to increase CGT
  
  
• New CGT exemption on sale to tenants - The choice of a tax relief for landlords, through the proposed two year exemption from CGT on sales to tenants, was unexpected, in part because the political case for a benefit to be given to an asset-rich and wealthy (generally speaking) group feels a difficult one to make in the current economic and fiscal climate.  But the value of this tax cut (costed at just £20 million per year) is a drop in the ocean compared to the overall CGT take, indicating that this policy is expected to benefit relatively few people.
  
  
• Stamp Duty Land Tax – no new ideas here, just making permanent the increase to the threshold at which first-time buyers pay stamp duty to £425,000 from £300,000.
  
  
• Green Taxes – ruling out further green levies
  
  
• Small Business Tax Incentives and R&D -  a commitment to retain existing tax incentives for small businesses and R&D tax reliefs.

What was missing? 

• New announcements - a general lack of new ideas – most of the tax policies announced in the Manifesto are reannouncements of things that were mentioned in the March Budget or earlier;
  
  
• Inheritance Tax - no proposals to abolish IHT or even to meaningfully restructure it;
  
  
• NICs plan - no specific planning or timeline for the long-term objective of getting rid of NICs (not surprising given the cost c.£30bn per year beyond the current changes proposed to do this). Instead this would only happen "when it is affordable to do so". If commentators are correct (see above for IMF and IFS views), then we should not expect that to be seen any time soon;
  
  
• Spending cuts plan - no plan for achieving the spending cuts to unprotected Government departments that have already been budgeted for over the next few years.
  
  

The Labour Manifesto Launch on Thursday 13 June

Key tax measures included in the manifesto

• NICs, Income Tax and VAT – A commitment not to increase National Insurance, Income Tax or VAT with a general commitment "to ensure taxes on working people are kept as low as possible".
  
  
• Corporation Tax – commitment to cap corporation tax at 25% over the life of the Parliament and to retain the permanent full expensing measure announced by the Conservatives in the Spring Budget.
  
  
• VAT on private school fees – the long-announced policy to introduce VAT (and business rates) on private school fees is included, which is estimated to raise £1.5bn per year (looking at tax year 2028-29).
  
  
• Non-doms – Labour's policy to replace the non-dom system with a much shorter-term scheme is included but with no additional detail on how this might be implemented differently to the Conservative reform of non-doms other than the costings document references that it does not include £600m revenue from "removing non-dom discount loophole" in 2025-26 (presumably it is not included because the costings are based on tax year 2028-29 projections).
  
  
• Inheritance Tax – a specific commitment is included to end the use of offshore trusts to avoid inheritance tax.
  
  
• Carried Interest – the long-announced policy to tax carried interest at higher rates is included with the statement that "Private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole". No further detail on how this will be done is included in the manifesto. Labour expect it to raise £565m in tax year 2028-29.
  
  
• Energy Windfall Tax – confirmation Labour will increase the rate of the windfall tax by 3%, and extend the sunset clause from end March 2029 to the end of the next Parliament. They will also remove the 'unjustifiably generous' investment allowances. This is projected to raise £1.2bn per year and will (together with £3.5bn per year of borrowings) fund the Green Prosperity Plan.
  
  
• Business Rates – Labour will reform the system which will 'balance the playing field between the high street and online giants' – this is expected to be revenue neutral.
  
  
• Stamp Duty – increasing rate of stamp duty surcharge paid by non-residents by 1% (raising £40m per year by 2028/29).
  
  
• Tax avoidance - Labour have said they will increase registration and reporting requirements, strengthen HMRC's powers, invest in new technology and build capacity within HMRC which, combined with a renewed focus on tax avoidance by large businesses and the wealthy, will begin to close the tax gap. This investment in HMRC is costed at £855m per year.

What was missing? 

• New announcements – again there were no new 'big ideas' in the manifesto with all of the main points having been widely trailed for some time now.
  
  
• Detail – Labour seem to have been deliberately light on any detail as to how and when they implement any of the announced policies. In fairness, this is a somewhat 'snap election', and Labour have indicated they would want independent OBR forecasts before introducing any changes so perhaps it is unsurprising that they have kept the detail (very) light.
  
  
• Pensions Lifetime Allowance – Labour had previously said it would reintroduce the pensions lifetime allowance. They dropped this policy before publication of the manifesto and there is no mention of it in the manifesto.
  
  
• Capital gains tax – no mention of capital gains in the manifesto, but Rachel Reeves did confirm to FT journalists on the day of the conservative manifesto launch that Labour has no plans to increase CGT. That said, there would still presumably be wriggle room to amend some of the allowances and reliefs that relate to CGT.
  
  
• Wealth tax – Rachel Reeves has previously ruled out introducing a wealth tax, and there is no mention of any wealth taxes in the manifesto document. Interestingly though, there is a clear focus on not increasing tax for "working people" throughout the document so perhaps there will be some wealth-related tax changes to come, especially if that £30bn elephant in the room becomes a reality…
  
  
• Budgets – the manifesto commits to only one 'major fiscal event' per year. We expect the first of these will be in the Autumn, assuming Labour win the election.