With 411 seats (giving a majority of 172), the incoming government will be looking to push through various manifesto commitments to support its headline priority of economic growth. From a tax perspective, there may be little room for manoeuvre, given the party’s previous undertakings not to increase the basic, higher or additional rates of income tax, NICs rates or VAT.
Rachel Reeves made little mention of tax in her inaugural speech as Chancellor, other than saying she would keep taxes, as well as inflation and mortgages, ‘as low as possible’ to help deliver grow the economy and economic stability. Reeves repeated her commitment to ‘robust fiscal rules’ which, she said, includes Labour’s commitments on income tax, NICs and VAT.
Reeves reaffirmed the importance of delivering economic growth, saying: ‘New Treasury analysis that I requested over the weekend shows that, had the UK economy grown at the average rate of other OECD economies this last 13 years, our economy would have been over £140 billion larger. This could have brought in an additional £58 billion in tax revenues in the last year alone.’
Treasury officials have been instructed to provide an assessment of the state of the UK government's spending commitments 'in order to understand the scale of the challenge'. Reeves will present this to Parliament before the summer recess. A Budget will be held later this year, the date of which is yet to be confirmed, alongside a forecast from the Office for Budget Responsibility.
Tax practitioners have been quick to comment.
Innovation key to growth: Business innovation could help kickstart the economic growth that has become the centre-piece of the new government’s policy platform – as Sara Brigden, Managing Director at ForrestBrown, comments: ‘The government should start by setting ambitious targets for R&D investment, backed up by a renewed commitment to R&D tax incentives to encourage private sector innovation and make the UK an attractive place for inward investment. After years of change and uncertainty undermining confidence in the scheme, businesses need stability to plan R&D investment for the long term.’
As the CIOT had previously reported, stability and certainty are typically more important to businesses than any particular rate of relief when it comes to planning investment. Commenting on the changes to the R&D tax relief regime over the last few years, Ele Theochari, Partner at Blick Rothenberg, urges the new government to ‘allow these changes to take full effect before making any further alterations and work closely with stakeholders and professional bodies to allow businesses to effectively plan for the future. The Labour government had already mentioned the potential to tinker with the R&D tax relief rates for certain sectors; however, great care must be taken to not cherry-pick certain industries, thereby disincentivising innovation elsewhere.’
Personal and employment taxes: On personal taxes, fiscal drag presents an ongoing challenge politically, but also allows the Exchequer to bring in more revenue without the need to raise income tax rates. Conspicuous by its absence, says Robert Marchant, Partner and Head of Tax at Crowe UK, was any comment by the government about unfreezing the personal allowance or basic rate threshold: ‘The impact of “fiscal drag” has already been significant ... both on how more people and companies end up paying more tax but also on the administrative complexity that organisations deemed to be “large”, by the tax legislation, have to deal with, despite not having large tax or finance teams in place to handle these requirements. Figures from HMRC show that the number of people paying income tax has risen to 4.4m in three years owing to a freeze in tax thresholds. There have been no suggestions from the Labour Party that they will take actions to address this.’
Robert Salter, a Technical Director at Blick Rothenberg, suggests potential changes to personal and employment tax rules to encourage entrepreneurship and drive economic growth, such as introducing tax relief for personally incurred training costs, increasing the tax-free limit on relocation expenses to ‘at least £30k’ per employee; ensuring the tax rules incentivise profit-related pay; uplifting the value of shares that can be granted tax-free; and streamlining the IR35 rules to reduce compliance challenges.
Andrew Snowdon, Chairman of UHY National Tax Group, points out the uncertainty around the pensions lifetime allowance, and questions whether the new chancellor will continue to rule out bringing some sort of cap back, having previously committed to reintroducing a limit but with fewer unintended consequences. ‘That lack of certainty is deterring people from saving for their retirement. The Labour government should be open over what they plan for the lifetime allowance and pledge to stick to that.’
The City: Kevin Cummings, Partner and Head of UK Tax Practice at McDermott, said that Labour’s promise that ‘change begins now’ would ‘resonate with the City, but perhaps for different reasons’.
‘With an almost certain attack on the way many in the private equity industry are compensated (through the anticipated carried interest reform), this may be just the start,' Cummings said. 'The new government has not ruled out a more general levelling up of capital gains taxes with income tax rates, something that will deter long-term investment and retirement planning. We can expect further adverse reforms for those that come to the City from overseas and who might be taxed under a fading non-dom regime, and likely inheritance tax reform is expected to penalize families holding wealth overseas through offshore trusts. Businesses have been promised a stay on corporation tax rises, and we’ll see if the new government can hold its manifesto pledge not to increase income taxes and national insurance for the most entrepreneurial. They may well still have a pop at the self-employed, perhaps by re-opening the ill-fated reform of partner taxation, equalizing the national insurance drag on self-employed partners with employees.’
Abolition of non-dom status: Many advisers repeated concerns over proposed changes to the non-dom rules.
Draft legislation for the non-dom changes had not been published ahead of the general election, leaving those potentially caught by any future new rules unable to take informed decisions. Initial proposals could, for example, be amended or even dropped and never become law. The 6 April 2025 start date now seems challenging, given that the next Budget is not likely to be delivered before mid-September at the earliest. Robert Brodrick, Private Client Partner at Payne Hicks Beach, comments: ‘Most people who work with international clients are clear that the UK’s non-dom regime is not fit for purpose, but with their huge majority the new Government has the opportunity to change it in a positive way that will encourage people to bring their businesses to the UK. Above all, families like this are attracted by stability – they don’t mind paying tax ... my message for the new Prime Minister and to his Chancellor is to ask them to take time to understand the impact of the changes that they decide to make, particularly where non-doms are concerned, and give them time to make informed decisions because once they have left, they are unlikely to come back until they know that it is safe to get back into the water.’
Alex Straight, Partner and spokesperson for the international group at Blick Rothenberg, suggests that losing non-dom status could be significant for Americans living and working in the UK, with the potential for greater disparity between US and UK taxes depending on the outcome of the November 2024 US presidential election: ‘The non-dom tax regime historically meant that many Americans living in the UK could avoid a tax liability (at high UK tax rates), on their non-UK source income and gains and this will typically not be the case on a going forward basis. There also has not been any commitment from Labour about capital gains taxes. Currently the UK main tax rate on capital gains is comparable to the US, but any increase to the main rate or changes for carried interest will push up the global effective tax rate for Americans in the UK.’
RSM has been looking at non-doms from a funding perspective, asking whether the proposed changes will raise the extra tax needed to fund the government’s other policy commitments. Rachel de Souza, Partner at RSM UK, comments: ‘HMRC estimates that the UK currently has at least 83,800 non-domiciled and deemed domiciled individuals, paying a total of £12.3bn of tax. Interestingly, although the number of taxpayers has risen by 6%, the tax being paid has actually fallen slightly, which suggests that there is a small amount of turnover between wealthier non-doms leaving the UK and being replaced by less affluent arrivals. In total, only 2,400 individuals chose to pay the remittance basis charge in 2022 and it is from these people that the government is expecting to raise £3.2bn. On average that implies an additional tax yield of over £1.34m per non-dom.
BDO point out that the estimated number of non-domiciled taxpayers rose to 74,000 in 2022/23, meaning a growing number of individuals could be affected by abolition. Elsa Littlewood, Private Client Tax Partner at BDO, said: ‘We have already seen several non-doms accelerate their plans to leave the UK and expect the numbers of departures to increase over the coming months. Of course, the very fact that they are non-doms means that they were going to leave the UK at some point; what is perhaps going to be more interesting is the impact a new regime will have on the numbers of people investing in and coming to work in the UK in the future.’
Tax simplification: As Robert Marchant points out, complexity in the tax system drains resources and stifles growth, with ‘tinkering to reliefs and exemptions in order to increase the tax yield, making it an even greater challenge for individuals and businesses to understand the tax system and to get it right’.
Phil Blackburn, Senior Tax Partner at Lubbock Fine, proposes three simple changes to improve the tax system: reinstate the OTS; invest in HMRC skills; and review the anti-avoidance legislation with a view to providing a clear set of rules which do not inadvertently catch ‘innocent’ taxpayers.
'The elephant in the room': Customs will come into focus for the government shortly after the Parliamentary recess when the EU biometric travel registration scheme is introduced on 6 October 2024 (unless of course it is delayed). Although not a key moment for business, this could be the point when individuals feel the impact of the end of freedom of movement.
In terms of trade, Simon Sutcliffe, Partner Customs & Excise Duty at Blick Rothenberg, urges the government not to pursue a full-scale review of the EU/UK trade agreement, entry to the customs union (something Prime Minister Starmer has previously ruled out), or limited access to the single market: ‘None of these would be achievable from an EU perspective or be helpful in terms of having to row back on the newly signed non-EU free trade agreements.
‘Instead, the biggest beneficial change that the new government could achieve would be to agree common food safety and health standards with the EU to ease the bureaucratic, costly and logistical headache faced by both importers and exporters of food products. The new border control posts are struggling to meet the demands of traffic passing through them for inspection and scrutiny as are veterinary services and the traders themselves’, he added.
With 411 seats (giving a majority of 172), the incoming government will be looking to push through various manifesto commitments to support its headline priority of economic growth. From a tax perspective, there may be little room for manoeuvre, given the party’s previous undertakings not to increase the basic, higher or additional rates of income tax, NICs rates or VAT.
Rachel Reeves made little mention of tax in her inaugural speech as Chancellor, other than saying she would keep taxes, as well as inflation and mortgages, ‘as low as possible’ to help deliver grow the economy and economic stability. Reeves repeated her commitment to ‘robust fiscal rules’ which, she said, includes Labour’s commitments on income tax, NICs and VAT.
Reeves reaffirmed the importance of delivering economic growth, saying: ‘New Treasury analysis that I requested over the weekend shows that, had the UK economy grown at the average rate of other OECD economies this last 13 years, our economy would have been over £140 billion larger. This could have brought in an additional £58 billion in tax revenues in the last year alone.’
Treasury officials have been instructed to provide an assessment of the state of the UK government's spending commitments 'in order to understand the scale of the challenge'. Reeves will present this to Parliament before the summer recess. A Budget will be held later this year, the date of which is yet to be confirmed, alongside a forecast from the Office for Budget Responsibility.
Tax practitioners have been quick to comment.
Innovation key to growth: Business innovation could help kickstart the economic growth that has become the centre-piece of the new government’s policy platform – as Sara Brigden, Managing Director at ForrestBrown, comments: ‘The government should start by setting ambitious targets for R&D investment, backed up by a renewed commitment to R&D tax incentives to encourage private sector innovation and make the UK an attractive place for inward investment. After years of change and uncertainty undermining confidence in the scheme, businesses need stability to plan R&D investment for the long term.’
As the CIOT had previously reported, stability and certainty are typically more important to businesses than any particular rate of relief when it comes to planning investment. Commenting on the changes to the R&D tax relief regime over the last few years, Ele Theochari, Partner at Blick Rothenberg, urges the new government to ‘allow these changes to take full effect before making any further alterations and work closely with stakeholders and professional bodies to allow businesses to effectively plan for the future. The Labour government had already mentioned the potential to tinker with the R&D tax relief rates for certain sectors; however, great care must be taken to not cherry-pick certain industries, thereby disincentivising innovation elsewhere.’
Personal and employment taxes: On personal taxes, fiscal drag presents an ongoing challenge politically, but also allows the Exchequer to bring in more revenue without the need to raise income tax rates. Conspicuous by its absence, says Robert Marchant, Partner and Head of Tax at Crowe UK, was any comment by the government about unfreezing the personal allowance or basic rate threshold: ‘The impact of “fiscal drag” has already been significant ... both on how more people and companies end up paying more tax but also on the administrative complexity that organisations deemed to be “large”, by the tax legislation, have to deal with, despite not having large tax or finance teams in place to handle these requirements. Figures from HMRC show that the number of people paying income tax has risen to 4.4m in three years owing to a freeze in tax thresholds. There have been no suggestions from the Labour Party that they will take actions to address this.’
Robert Salter, a Technical Director at Blick Rothenberg, suggests potential changes to personal and employment tax rules to encourage entrepreneurship and drive economic growth, such as introducing tax relief for personally incurred training costs, increasing the tax-free limit on relocation expenses to ‘at least £30k’ per employee; ensuring the tax rules incentivise profit-related pay; uplifting the value of shares that can be granted tax-free; and streamlining the IR35 rules to reduce compliance challenges.
Andrew Snowdon, Chairman of UHY National Tax Group, points out the uncertainty around the pensions lifetime allowance, and questions whether the new chancellor will continue to rule out bringing some sort of cap back, having previously committed to reintroducing a limit but with fewer unintended consequences. ‘That lack of certainty is deterring people from saving for their retirement. The Labour government should be open over what they plan for the lifetime allowance and pledge to stick to that.’
The City: Kevin Cummings, Partner and Head of UK Tax Practice at McDermott, said that Labour’s promise that ‘change begins now’ would ‘resonate with the City, but perhaps for different reasons’.
‘With an almost certain attack on the way many in the private equity industry are compensated (through the anticipated carried interest reform), this may be just the start,' Cummings said. 'The new government has not ruled out a more general levelling up of capital gains taxes with income tax rates, something that will deter long-term investment and retirement planning. We can expect further adverse reforms for those that come to the City from overseas and who might be taxed under a fading non-dom regime, and likely inheritance tax reform is expected to penalize families holding wealth overseas through offshore trusts. Businesses have been promised a stay on corporation tax rises, and we’ll see if the new government can hold its manifesto pledge not to increase income taxes and national insurance for the most entrepreneurial. They may well still have a pop at the self-employed, perhaps by re-opening the ill-fated reform of partner taxation, equalizing the national insurance drag on self-employed partners with employees.’
Abolition of non-dom status: Many advisers repeated concerns over proposed changes to the non-dom rules.
Draft legislation for the non-dom changes had not been published ahead of the general election, leaving those potentially caught by any future new rules unable to take informed decisions. Initial proposals could, for example, be amended or even dropped and never become law. The 6 April 2025 start date now seems challenging, given that the next Budget is not likely to be delivered before mid-September at the earliest. Robert Brodrick, Private Client Partner at Payne Hicks Beach, comments: ‘Most people who work with international clients are clear that the UK’s non-dom regime is not fit for purpose, but with their huge majority the new Government has the opportunity to change it in a positive way that will encourage people to bring their businesses to the UK. Above all, families like this are attracted by stability – they don’t mind paying tax ... my message for the new Prime Minister and to his Chancellor is to ask them to take time to understand the impact of the changes that they decide to make, particularly where non-doms are concerned, and give them time to make informed decisions because once they have left, they are unlikely to come back until they know that it is safe to get back into the water.’
Alex Straight, Partner and spokesperson for the international group at Blick Rothenberg, suggests that losing non-dom status could be significant for Americans living and working in the UK, with the potential for greater disparity between US and UK taxes depending on the outcome of the November 2024 US presidential election: ‘The non-dom tax regime historically meant that many Americans living in the UK could avoid a tax liability (at high UK tax rates), on their non-UK source income and gains and this will typically not be the case on a going forward basis. There also has not been any commitment from Labour about capital gains taxes. Currently the UK main tax rate on capital gains is comparable to the US, but any increase to the main rate or changes for carried interest will push up the global effective tax rate for Americans in the UK.’
RSM has been looking at non-doms from a funding perspective, asking whether the proposed changes will raise the extra tax needed to fund the government’s other policy commitments. Rachel de Souza, Partner at RSM UK, comments: ‘HMRC estimates that the UK currently has at least 83,800 non-domiciled and deemed domiciled individuals, paying a total of £12.3bn of tax. Interestingly, although the number of taxpayers has risen by 6%, the tax being paid has actually fallen slightly, which suggests that there is a small amount of turnover between wealthier non-doms leaving the UK and being replaced by less affluent arrivals. In total, only 2,400 individuals chose to pay the remittance basis charge in 2022 and it is from these people that the government is expecting to raise £3.2bn. On average that implies an additional tax yield of over £1.34m per non-dom.
BDO point out that the estimated number of non-domiciled taxpayers rose to 74,000 in 2022/23, meaning a growing number of individuals could be affected by abolition. Elsa Littlewood, Private Client Tax Partner at BDO, said: ‘We have already seen several non-doms accelerate their plans to leave the UK and expect the numbers of departures to increase over the coming months. Of course, the very fact that they are non-doms means that they were going to leave the UK at some point; what is perhaps going to be more interesting is the impact a new regime will have on the numbers of people investing in and coming to work in the UK in the future.’
Tax simplification: As Robert Marchant points out, complexity in the tax system drains resources and stifles growth, with ‘tinkering to reliefs and exemptions in order to increase the tax yield, making it an even greater challenge for individuals and businesses to understand the tax system and to get it right’.
Phil Blackburn, Senior Tax Partner at Lubbock Fine, proposes three simple changes to improve the tax system: reinstate the OTS; invest in HMRC skills; and review the anti-avoidance legislation with a view to providing a clear set of rules which do not inadvertently catch ‘innocent’ taxpayers.
'The elephant in the room': Customs will come into focus for the government shortly after the Parliamentary recess when the EU biometric travel registration scheme is introduced on 6 October 2024 (unless of course it is delayed). Although not a key moment for business, this could be the point when individuals feel the impact of the end of freedom of movement.
In terms of trade, Simon Sutcliffe, Partner Customs & Excise Duty at Blick Rothenberg, urges the government not to pursue a full-scale review of the EU/UK trade agreement, entry to the customs union (something Prime Minister Starmer has previously ruled out), or limited access to the single market: ‘None of these would be achievable from an EU perspective or be helpful in terms of having to row back on the newly signed non-EU free trade agreements.
‘Instead, the biggest beneficial change that the new government could achieve would be to agree common food safety and health standards with the EU to ease the bureaucratic, costly and logistical headache faced by both importers and exporters of food products. The new border control posts are struggling to meet the demands of traffic passing through them for inspection and scrutiny as are veterinary services and the traders themselves’, he added.
