Weekly tax brief

How might Labour respond to the Budget?

08 March 2023
Based on the March 2023 opinion polls, Labour would win a significant majority if a general election was held now. Keir Starmer recently announced five ‘missions’ should they take power. These missions include making the UK a ‘clean energy superpower’ and a new plan for the NHS, but little has been said about the party’s future tax policies. In particular, how Labour might fund public services, stabilise the economy and secure their intention of the UK having the highest sustained growth in the G7 if they were to win the next general election.

The next general election must take place by January 2025 at the latest, but many anticipate it will be sooner, as few politicians will relish a Christmas gift of canvassing for votes in the depths of winter. Perhaps more likely is a general election in around 18 months’ time, meaning the window for Labour to set out their manifesto policies is shortening. So, what could Labour include in their next manifesto in relation to business taxes?

A sensible first step might be to look at the 2019 manifesto, but it seems the Conservatives have largely implemented many of those pledges themselves, such as increasing corporation tax rates, introducing a windfall tax on oil companies and reforming research and development (R&D) tax reliefs.

Turning then to Labour’s tax related policy announcements since their 2019 manifesto, to date these have been mainly limited to non-business tax announcements, including the proposed removal of charitable status for independent schools, so they would have to charge VAT on school fees, and the pledge to abolish the ‘non-dom’ status. However, the shadow chancellor has now announced that Labour will launch a review into business taxes, with the aim of creating a stable environment for business investment, an area in which the UK has lagged behind other developed countries in recent years. Such a review may include considering potential reforms to the UK’s capital allowances regime, which provides relief for capital investment by businesses.

So far, there appears to be limited differentiation between the two major political parties on tax policy for businesses. However, Labour’s next manifesto is likely to include significant spending commitments, and these will need to be paid for.

If clear white space is to be established on tax policy, some more radical proposals may be needed. For example, some Labour MPs have been pushing Keir Starmer to set out a wealth tax for the super-rich and there has also been a suggestion that capital gains tax rates could be aligned more closely with income tax rates. But what more could Labour do to ensure that businesses pay (or are seen to be paying) a perceived ‘fair share’ of tax?

A wealth tax equivalent for businesses is unlikely, but perhaps Labour could look at additional windfall taxes. We already have a windfall tax for oil and gas companies, which Labour have already stated they would extend by backdating the levy and restricting tax relief on certain investments. There is also currently a corporation tax surcharge for banking companies but, for example, could a new bank windfall tax be introduced to tax the additional profits generated from increased interest rates?

Could more be done to tax digital businesses? Plans to introduce an ‘online sales tax’ have been abandoned by the current government, but perhaps Labour could reconsider this.

In addition, Labour could revisit their 2019 plan to unilaterally introduce a unitary taxation of internationals, treating multinationals as a single enterprise with the UK taxing a share of the group’s worldwide profits based on the UK proportion of various attributes of the group, e.g. turnover, employees etc. The OECD’s pillar one measures, if introduced, would bring about global consensus on a partial unitary taxation approach for the world’s largest businesses. Such international agreement is not easy to achieve and progress on pillar one has been slow. As a result, Labour could be tempted to introduce such measures unilaterally. However, going it alone may be risky, as it could result in reduced investment in the UK by multinationals and could irk the international community.

Finally, could Labour reintroduce John McDonnell’s idea of employee ownership in large companies with every company with over 250 employees having to transfer a proportion of the business to the employees? Whilst this could be popular amongst employees, this is unlikely to be popular with large businesses, and could lead to businesses leaving the UK, or moving their headquarters outside the UK.

The year ahead may therefore be a decisive one as Labour wrestles with the political conundrum of establishing tax policies sufficiently different from the Conservatives, while remaining wary of veering too close to 2019 pledges, given the previous lack of success in the voting booths.