Updated 14 June 2024
With the general election now set for 4 July 2024, the main political parties have released their manifestos and are continuing to publicise their election pledges on tax and seeking to build their popularity among undecided voters. Here are our thoughts on what the Conservative and Labour manifestos say (and don't say) about tax.
For a reminder about recent tax policies already announced by the Conservatives see our summary of the Autumn 2023 Statement and the Spring Budget 2024.
9. High Income Child Benefit Charge (HICBC)
10. Business Taxes
11. Stamp Duty
One of the policies announced in the manifesto and widely trailed both in the NPF Policy Document and elsewhere is the proposal to "scrap the carried interest tax loophole enjoyed by a small number of private equity fund managers" on the basis that "private equity is the only industry where performance-related pay is treated as capital gains".
As an initial point, it could be argued (pretty strongly) that "loophole" is not a fair term to use. First, the taxation of carried interest in the UK has been reviewed and adjusted on multiple occasions over the years. The resulting regime is not simplistic and is intended to balance encouragement to asset managers to base themselves in the UK with a reasonable level of taxation. It does not, despite the press comment, simply result in CGT. Income flowing to carry holders (for example, coupon on debt securities or dividends paid by investee companies) is taxed as income in the usual way. Further, capital gains from carried interest are already taxed at a higher rate than ordinary UK capital gains (28% vs 20%), and that rate is not in international terms hugely generous (it is probably more the combination of the CGT treatment and the non-dom rules that is unusual). Many jurisdictions have either different regimes or favourable practices for carried interest. For example, the rates for carried interest include 28.5% in Germany, 26% in Italy, 30% in France and 15% in Ireland. The UK rate is therefore not out of kilter with international comparisons. And there are a number of further safeguards already baked in – there is no deduction for acquisition costs on the relevant capital assets (so it is really a tax on capital receipts, not on capital gains); and there are special rules to tax as income both shorter term holdings (and a 40-month holding period is needed) and disguised management fees. As such, in our view the current carried interest regime should not be described as a loophole in the sense of exploiting an unintended gap in the rules – these are considered, balanced rules, which are comparable to other jurisdictions.
However, it is right that the Government should consider from time to time the balance between the benefits arising from alternative asset managers locating in the UK on the one hand and a fair tax burden on their activities and investments on the other. The tax raised by this change is slated in the NPF Policy Document as partly funding a major upgrade of mental health services in the UK, an area crying out for further funding; but worth noting also that the Labour Party envisages this raising roughly c.£565 million in the financial year 2028-2029, which is not a huge amount in the scheme of the overall tax take.
There is no detail in the manifesto on exactly how this change will be implemented, and the £565m figure based on estimates in four years' time doesn't enable us to infer very much. So, if Labour does consult on next steps for the taxation of carry (Rachel Reeves, the Shadow Chancellor suggested on 1 February 2024 that the party does intend to and the FT reported on the day of Labour's manifesto launch that she had told colleagues she intended to do so) then what options are available to them? There are quite a few, but some of the more obvious options would be the following:
In recent months, the Labour Party has placed significant emphasis on appealing to business as being a safe pair of hands and this was echoed in the Labour manifesto, carrying through their commitment to publishing a roadmap. Publications on their website have long set out their "roadmap for business taxation" and so the inclusion of this policy in the manifesto was unsurprising. Alongside its inclusion in the manifesto and publication on the Labour website, there have been a number of announcements, going back to the October 2023 Labour Party Conference, including the following:
In a lecture given to Bayes Business School following the Spring Budget on 19 March 2024, Reeves has confirmed her party's commitment to empowering the OBR with a new fiscal lock and capping corporation tax at the current rate of 25% for the entirety of the first parliament. Finally, she used the same lecture to establish that Labour will continue to pursue two policies being followed by the current government: commitment to the 2% inflation target and a pledge to ensure that "day-to-day costs are met by revenues". Reeves hopes that this will lead to a scenario in five years wherein debt is falling as a share of the economy. In the manifesto the fiscal rules were set out as day to day costs being met by revenues and debt falling as a share of the economy by the fifth year of the forecast. The cap on the current rate of corporation tax also featured in the manifesto alongside a commitment to act should the UK corporation tax make it uncompetitive in an international context.
Reeves has also confirmed that the party would not hold an emergency Budget should the party win power: "the OBR requires 10 weeks' notice to provide an independent forecast ahead of a Budget and I've been really clear that I would not deliver a fiscal event without an OBR forecast." The likely result is that Labour, should they be elected, will not have their first major fiscal event until September. The manifesto also commits to only one major fiscal event per year.
The Labour Party have announced its proposal to end the VAT exemption on fees for private schools if they win the next general election. Currently private schools benefit from an exemption from VAT by two means: the first is under the general exemption for the provision of education by eligible bodies, and the second is by qualifying as a charity and benefiting from the VAT exemption for charities.
Ending these two exemptions may be simple enough, but VAT is a complicated area of tax law with several intricacies which could impact the amount of revenue the measure returns. The IFS estimates that removing tax exemptions from private schools would raise £1.6 billion a year in extra revenue (after allowing for input tax deductions, VAT on boarding fees and exemptions for specialist provisions). This is broadly in line with the Labour costings document which has estimated the revenue raise to be £1.5bn in tax year 2028/29.
The tax consequences of the change are not straightforward. This is in part due to VAT being a tax on the value added to goods and services, which is achieved by requiring the supplier of a good or service to account to HMRC for the VAT (known as output tax), but the supplier being able to reduce the amount that they owe to HMRC by the amount of VAT they have paid when receiving goods or services (input tax). A supplier making exempt supplies will see some or all of its input tax recovery limited, so the removal of the VAT exemptions for private schools may result in a better input tax recovery position. The interaction between output tax and input tax can create some strange results, with taxpayers sometimes able to obtain material credit for their input tax relative to their output tax. While current modelling from the IFS estimates that private schools would achieve an effective tax rate for VAT purposes of c.15%, this may be reflective of the current structure to private education services and pricing for it, and schools have not yet considered how they might organise themselves to be the most efficient that they can be.
A difficulty a Labour government would face is ensuring that the legislation ending the exemption for private schools works as they intend. They may want to ensure that schools cannot split out their services in a way which reevaluates the cost of teaching and accentuates the cost of other services which are VAT exempt such as after-school care and accommodation. Doing so in a way which does not accidentally capture childcare or special needs services provided by state schools or within communities may prove to be very challenging and could have unintended adverse consequences if it led to a rise in the cost of those service more generally. Further consideration may need to be given to the potential availability of large refunds where large capital expenditure has been undertaken in the previous ten years.
A Labour government would also need to give considerable thought to what anti-forestalling measures it may wish to include. Anti-forestalling measures are designed to prevent a taxpayer from taking advantage of a period before a measure comes into effect to mitigate unreasonably the impact of the upcoming measure. For example, many schools already give parents the opportunity to pre-pay school fees, to help families and schools to manage the future costs. Would any changes include anti-forestalling measures to prevent schools offering arrangements where parents pay in advance (and under the current VAT exemption) for education, and thereby save VAT on the fees? If so, when could such an anti-forestalling begin from (it could range from the date of any manifesto announcing the measure, the election day, the date that legislation is first put forward for the change or the date that legislation becomes law) bearing in mind fairness and principles governing retrospective taxation? There is no detail in the manifesto on this.
An interesting assumption made in the IFS paper is that a reduction in the number of pupils in private school education resulting from the VAT changes (and therefore not paying VAT on the fees under the new system) may not lead to a net reduction in VAT raised by the change, on the assumption that if parents have additional cash as a result of not paying fees (and VAT on those fees) for private school, they are likely to spend it on other things generating VAT receipts. This may be true, but the IFS do not seem to have considered that the reverse may also be true – for families needing to find additional cash to pay for private school, there may be a corollary reduction in other (VATable) spending?
One of Labour's biggest pitches, the proposed reforms of the tax regime for non-doms, has been mirrored by the Conservatives in the Spring 2024 Budget. This change has rendered the vast majority of the main parties' approaches to the tax treatment of non-doms an uncontested issue. Please see here for the Conservative Proposal. However, there do remain some important distinctions, and the Shadow Chancellor (Rachel Reeves) has unveiled plans to toughen the Conservatives' planned reduction of the tax benefits enjoyed by non-doms. Reeves hopes to raise an additional £600m by abolishing the 50% discount granted to non-doms in respect of foreign income and gains which arise in 2025-26, as was proposed at the Spring Budget. According to Labour, the tougher reform would raise over £1bn in the first year of implementation. The manifesto costings documents combines the amount raised by non-dom abolition with a crackdown on tax avoidance more generally, estimating the two together at £5.2bn in tax year 2028/29.
Whoever sits in Number 10, there will also be consultations on changes to the IHT rules in relation to non-doms. The Conservatives had decided to allow non-doms to shield foreign assets from inheritance tax through off-shore trusts. As part of her plans, the Shadow Chancellor has made it clear that she would reverse that decision, bringing in an estimated additional £430m of revenues annually. The manifesto states simply that Labour will end the use of offshore trusts to avoid inheritance tax which is an announcement that may have implications for a broader number of people than just non-doms.
The Labour Party has long been an advocate of the windfall tax, leading the initial calls for one to be implemented, and long been a critic of how the Conservative Party implemented it. Since its inception into UK law the Labour Party has criticised the scheme as it only applied to profits made from extracting UK oil and gas rather than extending to other activities like refining oil and selling petrol/diesel on forecourts. The Labour Party also criticised the availability of tax deductions which allowed them to deduct 91% of capital investment costs.
It was therefore unsurprising that the manifesto announced labours intention to
increase the total tax rate on profits from 75% to 78% (the EPL itself going from 35% to 38%) and extend the time period which the scheme will run for (the sunset clause) 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.
It was announced in the manifesto that Labour would increase HMRC funding by investing an additional £855m per year. Labour believes that this would allow HMRC the resource (both in terms of personnel and in terms of technology) to better pursue those who are avoiding or evading tax and to modernise the tax office, thereby improving Labour's chances of meeting their manifesto promises. The aim is to close the tax gap by up to £5bn per year by the end of the next Parliament. HMRC's Chief Executive has said that for every £1 spent funding HMRC, there is an additional £9 returned in additional tax revenue. This would then be boosted by the gains created by updating and modernising HMRC's technology.
Rachel Reeves had previously announced that alongside operational changes (staffing and technology), there would also be some planned legislative changes. The manifesto itself, is light on detail but does state that they will increase registration and reporting requirements. This could be a reference to previous suggestions of broadening the scope of the disclosure of tax avoidance scheme rules ("DOTAS"), as well as introducing quarterly reporting (which would not be made public) on the nature and volume and nature of HMRC's criminal powers.
Following the cuts to National Insurance Contributions (NICs) that were announced at the Autumn Statement in November, and Spring Budget earlier this year, it came as no surprise that the Conservative Party Manifesto announced that a future Conservative Government would cut employee NICs by a further 2p (a 1p cut in April 2025, followed by a further 1p cut in April 2027). In addition Self-employed NICs would be abolished entirely over the course of the Parliament (staggered as a series of 1p cuts).
The focus on cutting NICs rather than headline rates of income tax probably reflects the fact it is cheaper to cut employee NICs, primarily because NICs are generally not paid by individuals who have reached the State Pension age. In January HMRC estimated that a 1p cut to the main rate of employee NICs would cost c.£4.6 billion in 2024/25, as compared to c.£6 billion for a 1p cut in the basic rate of income tax.
The Conservative Manifesto also repeats the Chancellor's statement from the March Budget that the Party has an ambition to fully abolish employee NICs "when financial conditions allow". Given that the additional cost of fully abolishing employee NICs would presumably be c.£30 billion a year by the end of the Parliament, it is unsurprising that no timeline is given for when this ambition might be fulfilled.
The additional cuts to NICs should be balanced against the expectation that personal tax thresholds will continue to be frozen. It is perhaps telling that the Conservative Party Manifesto commits to not to increase "the rate" of income tax, but there is no promise that income tax will not be increasing in the next Parliament. For many taxpayers, the effect of this "fiscal drag" will offset the benefit of any cut in the headline rate of NICs, resulting in an increase in their tax burden. The continued freezing of personal tax thresholds was projected by the OBR in March to raise a combined £41.1 billion tax revenue for the Government in 2028/29. For context, the Conservative Party costings for the 2% cuts to NICs announced in their Manifesto put the cost of the cut at £10 billion by 2028/29.
The Conservatives have also announced a policy to introduce a "triple lock plus" proposal that aims to protect pensioners' tax-free personal allowance. The UK state pension currently increases by the highest of three measures: the rate of inflation (measured by the CPI), average wage growth, or 2.5%. The result is that the state pension increases every year, even in years where wages stagnate and there is no inflation. The "triple lock plus" proposal would increase pensioners' tax-free personal allowance each year by the same measure as that of the state pension. If the CPI suggests that inflation is 10%, then the state pension rises by 10% and so does pensioners tax free allowance. This would mean different personal allowances depending on age which is an unhelpful further complication to the already-complicated UK tax system. The Conservative Manifesto estimates that this policy would cost £2.4bn per year by the end of the next Parliament.
Until recently a high-profile Labour proposal, the reform of the tax regime for non-doms ultimately became one of the most important announcements by the Chancellor at the Spring Budget. Non-doms are individuals who are resident for tax purposes in the UK, but (broadly – the rules are complicated and based on case law) whose permanent residence is overseas.
By international standards, the UK currently has a generous non-dom regime (although a number of jurisdictions have moved to introduce generous systems). Non-doms are currently able to reside in the UK and pay tax on their income or gains only if it is either UK source or is "remitted" into the UK – they do not pay UK tax on their unremitted foreign income or capital gains. There are also inheritance tax benefits to non-doms, as they do not generally pay IHT on worldwide assets.
Under the Chancellor's plans, the non-dom regime will be replaced in its entirety by a residence-based regime. Any individuals becoming UK residents after ten years of non-UK residence would start to pay UK tax on the same basis as any other UK resident once they have been in the UK for four years:
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First four years |
Subsequent years |
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Individuals who qualify for the new regime will not pay any UK tax on foreign income and gains ("FIG") or non-resident trust distributions, even if they bring their foreign income and assets into the UK (the "FIG regime"). |
After those 4 years, those individuals will pay UK tax on the same basis as any other UK resident individual. |
There will inevitably be a huge number of details to work through, but this is what we know so far:
If the Conservatives win the next election, the abolition will take effect from 6 April 2025. It is likely that that changes would also happen on the same timeline if Labour wins the next general election.
As noted above, non-dom reform was a Labour proposal devised to fund an increase in public spending. As the Conservatives then used the same reform to fund tax cuts, the press interpreted the Government's announcement as a move to undercut Keir Starmer in the lead-up to the general election. In response, Rachel Reeves has now unveiled plans to toughen the planned changes, detail provided here . If anything, the Tories' announcement of the non-dom reform during the Budget may mean that Labour will be able to enact it more quickly than previously anticipated, as parliamentary draftsmen will have already started working on the bill.
As noted in our Spring Budget update HICBC was known for being unfair – two parents could (even following the Spring budget changes) earn £59k each and have full child benefit, whilst another couple could have far lower combined earnings but have their child benefit reduced or withdrawn entirely (via the HICBC) if one earns over £80k. The Chancellor announced a proposal to move to a 'household income' basis of assessment to remove this unfairness. A Commitment to a £120,000 'household income' threshold from April 2026 is now included in the manifesto.
The Conservative Party Manifesto is surprisingly light on new business tax policies. None of the tax cuts in the Manifesto are targeted at businesses, and most of the commitments are just repetitions of announcements from the Spring Budget. Instead, the focus of the Manifesto is commitments to maintaining existing regimes, reliefs and tax incentives for businesses.
It was announced at the Spring Budget that the VAT registration threshold will be increased from £85,000 to £90,000. The purpose of this change is to help SMEs grow. Whilst welcome news for business near the threshold, it did not address the cliff-edge effect of such a high VAT registration threshold. There is now a Manifesto commitment to keeping the threshold under review, and to explore options to smooth the cliff edge.
The Conservative Party Manifesto commitment to make permanent the existing (temporary) stamp duty land tax (SDLT) threshold increase for first time buyers up to £425,000 is a slightly underwhelming offering. There had been some expectation that the Manifesto would go further, whether by reducing SDLT more broadly or by introducing more targeted rule changes to incentivise downsizing, especially among the elderly, by waiving SDLT for downsizing 'elders' to encourage them to move to suitable housing and increase the supply of larger homes.
Despite plenty of press speculation over the past year that the Conservatives were considering cutting inheritance tax (or scrapping it entirely), there is nothing in the Conservative Party Manifesto. Presumably the political decision was taken that announcing further cuts to NICs would be more of a vote winner in the upcoming election.
The Government announced at the Budget that it will be moving towards a residence-based system (rather than a domicile-based one) for IHT. However, this will be subject to consultation and these changes will not be implemented until 6 April 2025. Indeed, depending on the outcome of the upcoming election these changes might not take effect at all.
