By David Manning - Manager, Blockchain & Crypto Team While the title might seem dramatic, it is certainly the sentiment you will find across the array…
(This article comes from a series of tweets by Daniel on Thursday 21 November, following the release of the Labour manifesto. Follow Daniel on Twitter @DanielSladenUK).
Helpfully, Labour has put all of their tax proposals and spending measures in one place – a bit clearer than the fluffy language of manifesto – Funding Real Change – so what do we know?
Corporation tax: as expected there is a pledge to increase rates, but still staying below 2010 rate. This means a ‘gradual’ increase back to 26%, but with a small profits rate of 21%. Small profits in this instance means a turnover below £300k. The headline rate will therefore be 21% in 2021, 24% in 2022 and 26% by 2023. Small profits rate increases by 1% in 2022 & 2023 from current 19%.
On corporate tax reliefs, a plan to phase out large company R&D reliefs (RDEC scheme) and patent box – the SME regime is to remain unchanged.
Also more noise on the wider ‘review of corporate tax reliefs’ using January 2019 HMRC costings. The aim is to reduce the value of reliefs by about 1% (est. £4.3bn) by reducing or removing those that aren’t achieving stated policy aims. Long term, lots of detail and one for connoisseurs… Labour’s review of corporate tax reliefs
Income tax: expected rises to 45% for incomes above £80k, 50% above £125k (caution: rates don’t seem to be on the face of current documents, but are being widely reported, and sound right). Not explicit whether any change to >£100k loss of personal allowance, but comments elsewhere suggest not.
Headline rate changes are not slated as a major revenue raiser in themselves – on first glance some conservative assumptions on taxable income elasticity based on IFS data. The bigger impact comes from reform of taxation of unearned income and gains.
Dividends: rate matched to main income tax rates. The bigger (but predicted) change is taxing gains at same marginal rates as income. However, no national insurance on capital gains so still a differential, particularly for lower earners.
As well as rate alignment, this spells the end of dividend allowance and capital gains tax (CGT) annual exemption (just £1k de minimis). Structuring for a tax free investment return of more than £20k per annum will be more challenging.
However, something a bit like indexation makes a comeback with a ‘rate of return’ allowance which looks like it will be set to a 10 year GBP swap – we will be interested to see details of that and whether it really will be tax free compared with using a traditional inflation measure.
Entrepreneurs’ relief (ER): another non-surprise – abolishing entrepreneurs’ relief which will be replaced with something which is ‘a better form of support for entrepreneurs’ – comments by IFS, Resolution Foundation and recently Edward Troup have put this firmly on the table.
I can’t find analysis of how much of the saving from CGT reform is due to ER abolition, so it’s not clear whether the ER saving will be fully spent on the promised ‘better form of support’.
Financial transaction tax (FTT): now for everyone’s favourite, until they try to implement it – the financial transaction tax. This looks like an extension of Labour’s 2017 plan. An expansion of stamp duty reserve tax (SDRT) to pretty much all derivatives except short term IRD, and to bonds – although no increase in the headline rate.
Market maker exemption goes, but a discounted rate for financial firms (does this also mean financial trader exemption has gone?). The scope is based on residence of trade party, not execution venue of trade. Technically achievable? Probably. Not quick or easy though – see EU FTT process.
Inheritance tax (IHT): contrary to expectations (but probably smart politics) the only movement on IHT is to reverse additional residence nil rate band introduced by George Osborne – so no impact on estates up to £650k for married couples.
Married couples’s allowance: also removed (a welcome simplification vs often low value) but may not be a very smart political move.
Holiday homes: annual levy on second homes used as holiday homes – presumably not if qualified as furnished holiday lets – set at 200% council tax for property.
VAT on private school fees: another non-surprise.
Other issues: of course there are various promises on reducing avoidance, though the total tax benefit attributed to this is not massive.
That’s more or less it, leaving unitary taxation on multinationals for another day. Lots of detail to argue about, but it is likely that the ‘easy’ subjects of corporation tax rate and married couple’s allowance will dominate to start with.
One interesting calculation: effective tax rate on profits earned in company extracted as dividend goes from 45.3% to 55.6% for higher rate payer. For top rate payers it’s up from 49.9% to 63%, compared with 52% if trading through partnership…
But other than headline change in income tax rates, no increase in total tax if extracting company profits as salary, interest or rent.
Plenty more to look at but let’s wait for the round of accusations, rebuttals and urgent ‘clarifications’.