General Election 2017: Corporation tax and income tax for higher earners take the strain under Labour plans
A corporation tax rate of 26 per cent (21 per cent for small profits) and higher rates of income tax for those earning more than £80,000 a year are the most eye-catching tax proposals in Labour’s election manifesto, published on Tuesday. High earners will also be targeted with an extra levy on ‘excessive pay’ and a proposal to publish the returns of those earning more than £1 million a year. Businesses below the VAT threshold would be given a permanent exemption from quarterly reporting. Overall, Labour estimate their proposals would increase the tax take by just under £49 billion a year by 2021.
Launching the proposals, party leader Jeremy Corbyn said that Britain has been run for the rich, the elite and vested interests over the past seven years: “They have benefitted from tax cuts and bumper salaries while millions have struggled”. He said Labour is ruling out rises on VAT and National Insurance and on income tax for all but the richest five per cent of high earners. “The choice is now a Labour Brexit that puts jobs first, or a Tory Brexit that will be geared to the interests of the City, and will risk making Britain a low-wage tax haven. We are asking the better-off and the big corporations to pay a little bit more – and, of course, to stop dodging their tax obligations in the first place.”
A draft of the manifesto was leaked to the media last week, so much of what was contained in the final version was already known, but there are some changes and additional material, especially in the separate eight page costings document.
Tax proposals – Labour’s costings
Summary of Labour’s tax proposals
Taxes on income (inc national insurance)
- Those earning £80,000 will be taxed at 45 per cent, while a new 50 per cent rate will be reintroduced for those on salaries above £123,000. (See ‘Labour’s proposed income tax rises for high-income individuals’, IFS, for analysis)
- No rises in income tax for those earning below £80,000 a year
- Raise £1.3 billion from a new ‘excessive pay levy’ involving a 2.5 per cent charge on personal earnings above £330,000 and five per cent on those above £500,000. For employees the charge would be levied on employers (as with employers’ NI); for the self-employed the tax would (according to its originators, the Centre for Labour and Social Studies, be levied on the individual directly; where an individual is engaged through an intermediary structure, it would be levied on the structure.
- No increase in personal National Insurance Contributions
- Raise the headline rate of corporation tax from its current 19 per cent to 21 per cent in 2018-19, 24 per cent in 2019-20 and 26 per cent in 2020-21 (raising £20 billion, the party estimates) putting the revenue into education and skills budgets
- Reinstate the small profits corporation tax rate - taxes levied on profits below £300,000 would rise to 20 per cent in 2018-19 and 21 per cent in 2020-21
- Independent review of business tax reliefs and tax-planning structures like trusts. ‘Where reliefs do not provide any demonstrable benefit, our review will consider their removal, reform, or replacement with more effective incentives, such as grant schemes to encourage business investment, and we will make recommendations on the structuring of legal vehicles used in tax-planning… [I]t is anticipated that our review will deliver at least £4bn in immediate direct savings’
- Scrap quarterly reporting for businesses with a turnover of under £83,000.
- Introduce a package of reforms to business rates – including switching from RPI to CPI indexation, exempting new investment in plants and machinery from valuations, and ensuring that businesses have access to a proper appeals process – while reviewing the entire business rates system in the longer run; additionally Labour would give special consideration to the needs of rural councils in their re-evalution of business rate schemes and review extending the £1,000 pub relief business rates scheme to small music venues
- Maintain the apprenticeship levy but give employers more flexibility in how the levy is deployed, including allowing the levy to be used for pre-apprenticeship programmes And requiring the Institute for Apprenticeships and Technical Education to report on an annual basis to the Secretary of State on quality outcomes of completed apprenticeships
- Introduce a financial transactions tax (described in the manifesto as ‘Extend existing Stamp Duty Reserve Tax to cover a wider range of assets, ensuring that the public gets a fairer share of financial system profits’)
- “Take on the social scourge of tax avoidance through our Tax Transparency and Enforcement Programme, and close down tax loopholes”. Revenue-raising elements of this programme include restoring preferred creditor status for HMRC, reduced incentives to self-incorporate as a result of higher corporation tax, closing the ‘Mayfair Tax’ (private equity) and Eurobond ‘loopholes’, and clamping down on umbrella agencies and the use of Advanced Thin Capitalisation Agreements. The GAAR would be strengthened into a General Anti-Avoidance Rule. (See separate section / separate blog below for further details.)
- Pro-transparency measures include publishing tax returns of large companies and individuals earning more than £1 million per year, and ‘full country-by-country reporting’
- Require firms supplying national or local government to pay their taxes (ie no public contracts for tax avoiders)
- Act decisively on tax havens, introducing strict standards of transparency for crown dependencies and overseas territories, including a public register of owners, directors, major shareholders and beneficial owners for all companies and trusts
Indirect and property taxes
- No increase in VAT rates
- No VAT extension to food, children’s clothes, books and newspapers, or public transport fares
- Remove the VAT exemption on private school fees to pay for free school meals for all primary school children
- Increase the rate of Insurance Premium Tax to 20 per cent for private healthcare insurance products to fund free parking at NHS England hospitals for patients, visitors and NHS staff
- Implement the Soft Drinks Industry Levy (‘sugar tax’)
- A review into reforming council tax and business rates, in favour of options such as a land value tax
- New levy on purchases of UK property by offshore companies/trusts
Employment rights and pay
- A 20-point plan for security and equality at work, including an end to zero-hours contracts and equal rights for employees (including temporary and part-time)
- Shifting the ‘burden of proof’ in the so-called ‘gig economy’ so that the law assumes a worker is an employee unless the employer can prove otherwise
- Ban payroll companies, sometimes known as umbrella companies, which create a false structure to limit employers’ tax liabilities and limit workers’ rights
- Give employment agencies and end-users joint responsibility for ensuring that the rights of agency workers are enforced
- Set up a dedicated commission to modernise the law around employment status. New statutory definitions of employment status would reduce the need for litigation and make improve compliance.
- Raise the minimum wage to the level of the living wage (expected to be at least £10 per hour by 2020) with net fiscal benefits ringfenced to provide support to small businesses who would struggle to pay the living wage
- End the Public Sector Pay Cap
- Roll out maximum pay ratios of 20:1 in the public sector and companies bidding for public contracts
- Overhaul the existing childcare system in which subsidies are given directly to parents who often struggle to use them, and transition to a system of high-quality childcare places in mixed environments with direct government subsidy
- Reform childcare system - transition to a system of high-quality childcare places in mixed environments with direct government subsidy; extend the 30 free hours to all two-year-olds, and move towards making some childcare available for one-year-olds
- Reverse the ‘unfair’ employment tribunal fees
Social security and pensions
- Review the cuts to work allowances in Universal Credit, and review the decision to limit tax credit and UC payments to the first two children in a family
- Scrap Work Capability and Personal Independence Payment assessments, and set up a Commission to report into expanding the Access to Work programme
- An end to benefit sanctions
- Reverse social security cuts including cuts to bereavement support payment, the ‘bedroom tax’ and the abolition of housing benefit for 18-21-year-olds (additionally there is some confusion over whether Labour would end the benefits freeze)
- Guarantee the state pension ‘triple lock’ throughout the next Parliament so that pensions rise by at least inflation, earnings or 2.5 per cent a year, whichever is higher
- A commitment to ‘protect the pensions of UK citizens living overseas in the EU or further afield’
- Extend Pension Credit to ‘hundreds of thousands of the most vulnerable women’.
- We will commission a new review of the pension age
- Immediate review of the mineworkers’ pension scheme and British Coal superannuation scheme surplus
- Increase the Carer’s Allowance for unpaid full-time carers to align the benefit with rates of the Jobseeker’s Allowance.
- Fund child burial fees for bereaved parents
Fiscal and economic policy overview
- ‘Our manifesto is fully costed, with all current spending paid for out of taxation or redirected revenue streams’
- Target of eliminating the government’s current deficit spending within five years
- Committed to ensuring that the national debt is lower at the end of the next Parliament than it is today
- Boost capital spending with a £250 billion National Transformation Fund for investment in infrastructure, transport, energy systems, communications, scientific research and housing over ten years
- Strengthen Office for Budget Responsibility and make it accountable to Parliament
Other relevant policies
- Brexit: accept referendum result and negotiate a deal with Europe that puts jobs and the economy first, with a strong emphasis on retaining the benefits of the Single Market and the Customs Union
- Consult on implementing the recommendations of the Kerslake Review of the Treasury
- Deliver universal superfast broadband availability by 2022
- Meet the OECD target of three per cent of GDP spent on research and development by 2030.
- Using government procurement to ensure that anyone bidding for a government contract pays its own suppliers within 30 days
- Introducing a “right to own,” making employees the buyer of first refusal when the company they work for is up for sale.
- ‘To safeguard the offshore oil and gas industry, Labour will provide a strategy focused on protecting vital North Sea assets, and the jobs and skills that depend on them’
- Labour will establish a Scottish Investment Bank, with £20 billion of funds available to local projects and Scotland’s small businesses
- Build on the Development Bank of Wales using more than £10 billion from Labour’s new National Investment Bank
The following policies were included in the draft but not in the final version
- Establish a new employment allowance for small businesses that struggle to pay a higher living wage
- Introduce revenue neutral stamp duty incentives to encourage a good energy efficiency standard at the point of sale
The manifesto can be found here.
Paul Johnson, Director of the Institute of Fiscal Studies, said a £50 billion increase in tax, were it to be implemented, would take the UK tax burden to the highest level it's been in about 70 years. But, he added, there is an awful lot of uncertainty about whether you can actually raise that amount of tax. “[Labour] are talking about very, very large increases in taxes on companies which would likely reduce the amount of investment that they do. I think the actual amount you could get from these policies certainly runs into the tens of billions, but probably doesn't reach the £50 billion that Labour are claiming."
Business reaction has been at best mixed. The CBI said it "prioritises state intervention over enterprise" but welcomed proposals on skills, infrastructure and apprenticeships. Federation of Small Businesses national chairman Mike Cherry praised Labour for committing not to raise their National Insurance contributions for the self-employed and for scrapping quarterly reporting. However he called on Corbyn to honour his pledge to not raise corporation tax for SMEs. IoD director general Stephen Martin said policies such as banning zero hour contracts, or introducing pay ratios for companies with Government contracts, are ‘worryingly knee-jerk reactions’.
Stephen Ibbotson, ICAEW director of business, thought there were some good ideas but had questions over costs and delivery. “A National Investment Bank backed by the state for example could help stimulate funding and boost investment in infrastructure. In theory this would help stimulate growth and raise productivity, but whether Labour can deliver on this is a big ask.” “Whilst some measures such as commitments to exempt the smallest businesses from burdensome quarterly tax reporting and reforms to business rates are positive, there is not much overall to help businesses, especially SMEs”. Jonathan Riley, Grant Thornton’s UK head of tax, said that making a “cash cow” out of London to fund spending commitments “seems remarkably odd and risky” amid the economic uncertainty following the U.K.’s vote to leave the European Union. George Bull, senior tax partner at RSM, told Bloomberg that London would “bear the brunt” of Labour’s tax announcements.
Right of centre thinktanks were unsurprisingly critical. The Centre for Policy Studies said it was ‘economically crazy’. Julian Jessop, Chief Economist at the Institute of Economic Affairs, said: “Such high rates of taxation will disincentivise work, discourage investment and reduce innovation, making it unlikely that Labour’s targeted £48.6 billion would actually be raised.” But Social Market Foundation research director Nigel Keohane said shifting the burden of proof so that the law assumes a worker is an employee could ensure workers have appropriate rights and protections because its research has found that many self-employed people face the worst of both worlds. Tax campaigner Richard Murphy said the yield estimate from corporation tax is a ‘little high, but plausible’.
Summary by George Crozier and Hamant Verma