There were no tax surprises in Labour’s manifesto. The biggest promises were the negative ones: no increases in rates of income tax, NI, VAT or corporation tax. The positive ones were small: permanent measures scored as raising just over £7bn per year. Most of that would, according to the plan, come from reduced tax avoidance – a theme common to the manifestos of all three main UK-wide parties. As ever, this should be considered an uncertain revenue source. It will be particularly hard to get the desired revenue if Labour really mean that they want to raise all of the additional money from limiting (legal) avoidance opportunities, and not (illegal) evasion, which isn’t mentioned in the manifesto.
Labour have committed not to increase NICs or VAT, the basic, higher or additional rates of income tax or the main rate of corporation tax. While choosing not to increase tax overall is a legitimate political choice, pledges not to increase a wide range of specific taxes are problematic: they restrict a government’s ability to respond to changing circumstances and can seriously hamper tax reform. At least Labour didn’t tie their hands any further. And the wording of the income tax pledge leaves some room for measures that would increase income tax revenues, or for reform to parts of income tax, if desired.
Other than a pledge to replace business rates with an unspecified new system, the manifesto sets out no vision for substantive tax reform. There is no shortage of opportunities to make the tax system fairer and more conducive to growth. The hope must be that, if elected, the Labour party in government would be more ambitious than this.
Helen Miller, IFS Deputy Director
Labour’s carried interest proposal
‘Private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole.’
A banker pays tax on their bonus at a marginal rate of 47%; but that comes out of a bonus pot that was all subject to 13.8% employer national insurance. That’s a total tax of about 54%. By contrast, when private equity executives receive a share of the returns of their fund – called ‘carried interest’ – it is taxed as a capital gain, at 28%. That treatment wasn’t enacted by Parliament – it results from a spectacularly successful lobbying effort in 1987. Our view is that this treatment is both inequitable and wrong in law. We welcome Labour ending it.
The question is how much that will raise. Private equity executives made gains on carried interest of £3.4bn in 2020/21, which if taxed as income would have potentially meant another £600m of tax. The gains in 2021/22 were much higher – about £5bn, which if taxed as income would potentially yield almost £1bn.
And there is significant additional carried interest earned by private equity executives who are non-doms, which isn’t even included in these figures – and those tend to be the most senior executives, who earn the largest amounts. Our discussions with private equity industry figures suggest that carried interest reforms plus the non-dom reforms could potentially yield up to £2bn.
The important word in the previous paragraphs is ‘potentially’. There is no doubt that many private equity executives, particularly non-doms, would leave the UK rather than pay tax at 47%. Other countries in Europe and around the world would have more favourable regimes, and private equity executives are highly mobile, with many having only temporary ties to the UK.
One answer would be for Labour to increase the rate of tax, but not equalise it. That, however, seems ruled out by the manifesto wording.
It therefore seems likely that a significant number of private equity executives would respond to the additional tax by leaving the UK. Were this to happen, the economic effect of this is debatable: it would not (or at least, not necessarily) reduce private equity investment into the UK, but change the location that investment is made from. There would be wider effects, e.g. on service industries and asset prices, which deserve consideration but are beyond our expertise.
There are, therefore, a great deal of uncertainties, but Labour’s £600m figure seems to us to be reasonably prudent given that it is so much lower than the potential static yield.
We would make two suggestions for Labour’s reform, which would create useful pro-growth incentives for the private equity industry:
Labour’s reform should be targeted at the controversial ‘buyout funds’, not venture capital or infrastructure investment funds.
Labour’s reform should only apply to traditional carried interest – where either the executives put in no money, or money is ‘round-tripped’ and not actually at risk. It shouldn’t apply where private equity executives make a genuine investment into their funds. So if a private equity executive genuinely puts £1m into their fund, risks losing it, but the fund succeeds, then there remains a good argument that their return should be taxed as capital.
We would add as an aside that there is speculation that Labour are secretly considering equalising the rate of capital gains tax and income tax. If Labour were going to equalise the rates, they would not need to change the tax treatment of carried interest.
There were no tax surprises in Labour’s manifesto. The biggest promises were the negative ones: no increases in rates of income tax, NI, VAT or corporation tax. The positive ones were small: permanent measures scored as raising just over £7bn per year. Most of that would, according to the plan, come from reduced tax avoidance – a theme common to the manifestos of all three main UK-wide parties. As ever, this should be considered an uncertain revenue source. It will be particularly hard to get the desired revenue if Labour really mean that they want to raise all of the additional money from limiting (legal) avoidance opportunities, and not (illegal) evasion, which isn’t mentioned in the manifesto.
Labour have committed not to increase NICs or VAT, the basic, higher or additional rates of income tax or the main rate of corporation tax. While choosing not to increase tax overall is a legitimate political choice, pledges not to increase a wide range of specific taxes are problematic: they restrict a government’s ability to respond to changing circumstances and can seriously hamper tax reform. At least Labour didn’t tie their hands any further. And the wording of the income tax pledge leaves some room for measures that would increase income tax revenues, or for reform to parts of income tax, if desired.
Other than a pledge to replace business rates with an unspecified new system, the manifesto sets out no vision for substantive tax reform. There is no shortage of opportunities to make the tax system fairer and more conducive to growth. The hope must be that, if elected, the Labour party in government would be more ambitious than this.
Helen Miller, IFS Deputy Director
Labour’s carried interest proposal
‘Private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole.’
A banker pays tax on their bonus at a marginal rate of 47%; but that comes out of a bonus pot that was all subject to 13.8% employer national insurance. That’s a total tax of about 54%. By contrast, when private equity executives receive a share of the returns of their fund – called ‘carried interest’ – it is taxed as a capital gain, at 28%. That treatment wasn’t enacted by Parliament – it results from a spectacularly successful lobbying effort in 1987. Our view is that this treatment is both inequitable and wrong in law. We welcome Labour ending it.
The question is how much that will raise. Private equity executives made gains on carried interest of £3.4bn in 2020/21, which if taxed as income would have potentially meant another £600m of tax. The gains in 2021/22 were much higher – about £5bn, which if taxed as income would potentially yield almost £1bn.
And there is significant additional carried interest earned by private equity executives who are non-doms, which isn’t even included in these figures – and those tend to be the most senior executives, who earn the largest amounts. Our discussions with private equity industry figures suggest that carried interest reforms plus the non-dom reforms could potentially yield up to £2bn.
The important word in the previous paragraphs is ‘potentially’. There is no doubt that many private equity executives, particularly non-doms, would leave the UK rather than pay tax at 47%. Other countries in Europe and around the world would have more favourable regimes, and private equity executives are highly mobile, with many having only temporary ties to the UK.
One answer would be for Labour to increase the rate of tax, but not equalise it. That, however, seems ruled out by the manifesto wording.
It therefore seems likely that a significant number of private equity executives would respond to the additional tax by leaving the UK. Were this to happen, the economic effect of this is debatable: it would not (or at least, not necessarily) reduce private equity investment into the UK, but change the location that investment is made from. There would be wider effects, e.g. on service industries and asset prices, which deserve consideration but are beyond our expertise.
There are, therefore, a great deal of uncertainties, but Labour’s £600m figure seems to us to be reasonably prudent given that it is so much lower than the potential static yield.
We would make two suggestions for Labour’s reform, which would create useful pro-growth incentives for the private equity industry:
Labour’s reform should be targeted at the controversial ‘buyout funds’, not venture capital or infrastructure investment funds.
Labour’s reform should only apply to traditional carried interest – where either the executives put in no money, or money is ‘round-tripped’ and not actually at risk. It shouldn’t apply where private equity executives make a genuine investment into their funds. So if a private equity executive genuinely puts £1m into their fund, risks losing it, but the fund succeeds, then there remains a good argument that their return should be taxed as capital.
We would add as an aside that there is speculation that Labour are secretly considering equalising the rate of capital gains tax and income tax. If Labour were going to equalise the rates, they would not need to change the tax treatment of carried interest.
