Labour set out radical changes to taxation of capital gains, dividends and multinationals

The Labour Party have published their general election manifesto, which includes plans for higher corporation tax, income tax increases for those earning more than £80,000 and taxing capital gains and dividends at income tax rates with a single allowance.

The manifesto sets out plans to bring rail, mail, water and energy into public ownership, as well as scrapping universal credit, a living wage of at least £10 per hour and reducing average full-time weekly working hours to 32 within a decade with no loss of pay. Other tax policies include introducing unitary taxation of non-UK multinationals, an ‘excessive pay’ levy, scrapping entrepreneurs’ relief and the patent box, phasing out R&D tax credits for large corporations, a second homes tax, a windfall tax on oil firms and increases to inheritance tax.

A separate costings document sets out the amounts Labour expect their tax increases to raise, totalling just under £83 billion by 2023-24. The largest elements of this are corporation tax increases (£23.7 billion), taxing capital gains and dividends at income tax rates (£14 billion) and a financial transactions tax (£8.8 billion). The party believes it can raise £6.2 billion from a Fair Tax Programme which would include an Offshore Property Company Levy, more targeted audits by HMRC and pro-transparency measures.

Labour have also said they would hold a review of corporate tax reliefs. This would be conducted by the Treasury and would be informed by an expert panel which CIOT and other tax bodies (among others) would be invited to join. The review would be expected to report within six months.

In a combative speech launching the manifesto, Labour Leader Jeremy Corbyn said Labour will go after the tax dodgers, the bad bosses and the big polluters so that everybody in our country gets a fair chance in life. Corbyn said: “I accept the opposition of the billionaires, because we will make those at the top pay their fair share of tax to help fund world class public services for you – that’s real change. These policies are fully costed with no increases in VAT or income tax or National Insurance for anyone earning less than £80,000. That’s no tax increases for 95 per cent of taxpayers.”

Tax summary of Labour manifesto and accompanying documents

NB. This section contains, in Labour’s own words unless indicated with square brackets, content from the manifesto, the accompanying costings document and the review of corporate reliefs document. In terms of content from the costings document we have generally included that which provides further detail on the policy and its scope, but not the detailed methodology behind calculations of potential yields. The costings document itself also includes footnotes which we have generally excluded.

Income and capital gains tax changes

The manifesto says –

  • Ask those who earn more than £80,000 a year to pay a ‘little more’ income tax, while freezing National Insurance and income tax rates for everyone else.
  • End the unfairness that sees income from wealth taxed at lower rates than income from work.

The costings document includes the following costings for this area –

Income Tax: Additional Rate payable from £80,000 and new Super-rich Rate payable from £125,000
Mechanical yield: £11.4 billion
Behavioural response and deduction for devolved income tax in Scotland: £-6.0 billion
Post-behavioural estimated yield: £5.4 billion

Taxing income from wealth equitably and efficiently
Tax capital gains at income tax rates, including behavioural response: £9.0 billion
Tax dividends at income tax rates, including behavioural response: £9.0 billion
Additional reduction for uncertainty: £-4.0 billion
Post-behavioural estimated yield reduced further for uncertainty: £14.0 billion

Other
Scrap Married Persons Allowance: [Part of a group of ‘Other’ changes which would raise £5.2 billion between them]

The costings document adds –

Income Tax (England, Wales and Northern Ireland)

To estimate the pre- and post-behavioural yield from changes to income tax policy we have largely followed methodologies described by HMRC and the Institute for Fiscal Studies…

[The document then explains the methodology behind its yield calculations in some detail]

Taxing income from wealth equitably and efficiently

Labour will tax capital gains at the same level as income tax and abolish the lower income tax rate for dividend income. It is also a potential inefficiency and source of avoidance that income tax and capital gains tax have separate annual tax-exempt allowances, allowing the wealthy to separate their income into different forms in order to benefit from double tax relief. With a separate dividend tax rate some people with significant income from different sources can benefit from three separate tax-free allowances and there is evidence that business owners declare income in different ways purposely to take advantage of different rates and allowances. Primary residences will continue to be exempt from capital gains tax.

It is now widely recognised that Entrepreneurs Relief in its current form cannot continue, so we will scrap it and consult on a better form of support for entrepreneurs which is not largely just a handout for a small number of people. Sir Edward Troup, executive chair of HMRC until 2018, was reported recently to be calling for its removal on the basis of it providing “no incentive for real entrepreneurship”. Similar calls have been made by the Resolution Foundation and the IFS…

This means

  • Capital gains will be taxed at the marginal income tax schedule… Capital gains will still be taxed more lightly, as they are not subject to National Insurance: this is especially the case for those with income below the Higher Rate Threshold.
  • There will no longer be a separate annual exempt allowance for capital gains, above a de minimis threshold of £1,000.
  • As recommended by the Mirrlees Review we will introduce a ‘rate-of-return’ allowance set at contemporary 10-year bond rates to allow gains below this rate to be earned tax free.

There are very few estimates of the potential impact of a change of this type. We have used figures produced by the Institute for Public Policy Research in their 2019 paper ‘Just Tax’: their methodology is detailed there. It incorporates HM Treasury estimates on the potential behavioural effects from increases in capital gains tax due to ‘lock-in’ and substitution effects.

There are several reasons why this could be an underestimate, including that:

  • It does not incorporate the removal of the personal allowance for earners earning over £100,000.
  • Averaging gains above and below the allowance implicitly assumes gains above and below the threshold largely cancel each other out. Further explanation of this can be found on p14 of ‘Just Tax’.
  • It does not factor in the wider policies that Labour will adopt to tackle tax evasion and avoidance [see below]

The IPPR paper ‘Reforming the taxation of income from wealth’ estimates the potential yield from this policy at the alternative tax rates proposed by different political parties, giving a yield for 2023-24 of £16bn for Labour policies, reduced to £9bn after adjusting for behavioural change.

In addition to the lighter taxation of capital gains, owners of assets benefit from reduced rates of income tax on dividends from those assets: sometimes as low as 7.5%.

Labour proposes to equalise the tax treatment of income from dividends with other income by charging marginal rates equal to those in our income tax policy as well as – as with capital gains tax – removing the separate allowance subject to a de minimis threshold as with capital gains tax.

IPPR analysis (‘Reforming the taxation of dividends’, November 2019) suggested a direct effect of £11bn under Labour income tax rates, or £9bn after behavioural change in 2023-24. The first and third bulletpoints above, regarding the possibility of underestimation for capital gains tax reforms, apply here as well.

Due to the uncertainty around the yield from these two changes, we have reduced our estimates by £4bn to err on the side of caution.

Marriage Allowance

In their October 2019 ‘Estimated cost of non-structural tax reliefs’ HMRC forecast £535m of Marriage Allowance to be claimed under the system which allows “the transfer of 10% of the tax free personal allowance between couples who are married or in civil partnerships”. Uplifted to account for forecast earnings growth.

Corporate and financial services taxation

The manifesto says –

  • Reverse some of the Tories’ cuts to corporation tax while keeping rates lower than in 2010.
  • Taxation of multinationals, including tech giants, will pay for the operating costs of the public full-fibre [broadband] network.
  • Introduce a windfall tax on oil companies, so that the companies that ‘knowingly damaged our climate will help cover the costs’.
  • Create an’ innovation nation’, setting a target for three per cent of GDP to be spent on research and development (R&D) by 2030. Labour will achieve this target by increasing direct support for R&D and reforming the innovation ecosystem to better ‘crowd in’ private investment.
  • Make it easier for employers to spend the Apprenticeship Levy by allowing it to be used for a wider range of accredited training, in line with guidelines set by the Institute for Apprenticeships and Technical Education and government’s wider priorities for the economy. Help small businesses by increasing the amount that can be transferred to non-levy-paying employers to 50 per cent and introducing an online matching service to help levy-paying businesses find smaller businesses to transfer their funds to.
  • Launch a Climate Apprenticeship programme. Under this programme, employers will be expected to allocate 25 per cent of the funds in their Apprenticeship Levy accounts to training Climate Apprentices. These funds can be spent directly or allocated to a ring-fenced Climate Apprenticeship Fund, which will be topped up with any surplus raised through Inclusive Ownership Funds and made accessible to non-levy-paying businesses.

The costings document includes the following costings for this area –

Corporate taxation
Gradually reverse cuts to corporation tax to reach 21% (Small Profits Rate) and 26% (main rate): £23.7 billion
Unitary taxation of multinationals: £6.3 billion

Financial Transactions Tax
Extend stamp duty reserve duty, including behavioural change: £8.8 billion

Tax reliefs and expenditures
Efficiency review of corporate tax reliefs: £4.3 billion
Reform of R&D funding: £4.0 billion

Other
Reverse cuts to bank levy: [Part of a group of ‘Other’ changes which would raise £5.2 billion between them]

The costings document adds –

Corporation tax

Estimates for the yield of Labour’s Corporation Tax policy are based on HMRC’s ‘Direct effects of illustrative tax changes’. The yield from a 1pp increase from April 2020 is estimated at:

  • £2.0bn for 2020-21
  • £2.8bn for 2021-22
  • £3.1bn for 2022-23

These include some allowance for behavioural change and are assumed to be linear, subject to further allowance described below, in line with HMRC: “the effects of the illustrative changes can be scaled up or down to provide a rough guide to the potential effects. A reduction of 2p in a tax rate will cost around twice as much as a reduction of 1p”

Labour would, in contrast to the official baseline which has corporation tax at 17% from April 2020,

  • Reintroduce a small profits rate for firms with a turnover under £300,000 a year
  • Raise the main rate of corporation tax to 21% from April 2020, 24% from April 2021 and 26% from April 2022.
  • Keep the small profits rate at 19% in April 2020, rising to 20% in April 2021 and 21% in April 2021

[The document contains some further information relating to yield calculations]

Unitary taxation of multinational corporations

Currently multinationals operate with separate companies at ‘arm’s-length’: for example, Facebook Ireland or Facebook UK. Multinationals can ‘book’ or ‘bank’ profits in a way that is beneficial from a tax-planning perspective. Facebook’s advertising profits, for example, can be booked or banked in a low-tax jurisdiction such as Ireland. Labour will adopt a different approach: treating corporate groups under common ownership as unitary enterprises, so that profits are declared where economic activity occurs and where value is created. The system outlined in the independent report ‘Tax Multinationals: a New Approach’ is based on sales, assets and labour…

The report cites figures from a paper by Alex Cobham, Tommaso Faccio, and Valpy Fitzgerald that shows that if the UK adopted unitary taxation of US multinationals with turnover of $750 million or more alone, $3.96 billion could be gained. Based on the proportion of UK foreign direct investment made up of US multinationals, and on different assumptions about the profiles of non-US multinationals, they estimate a potential yield between £6.0bn and £13.7bn. The authors of the report, and other experts, have said that unitary taxation is consistent with existing tax treaties.

Even this lower bound estimate is likely to under-estimate revenues, since it is based only on US multinationals with turnover of $750 million or more, when there are a number of US multinationals with less than $750 million. Adjusting for the higher rate of corporation tax under Labour, and removing 30% for uncertainty and behavioural change, gives a lower estimate of £5.8bn in 2016 (uprated with inflation).

Financial Transactions Tax

In 2017 Labour proposed an extension of existing stamp duty reserve tax, drawing on the proposals of Professor Avinash Persaud in a paper, ‘Improving Resilience, Increasing Revenue: The Case for Modernising the UK’s Stamp Duty on Shares’.

The 2017 proposal was, first, to eliminate the existing market maker exemption. Secondly, to extend stamp duty to equity and credit derivatives. Third, stamp duty was to be extended to debt instruments (corporate bonds). The rate was set at 0.5% for non-financial firms, with a discounted rate of 0.2% for financial firms.

In total, this was forecast to raise £4.7 billion a year according to 2016 data. In developing these estimates the paper’s author used conservative estimates of the elasticity of demand – the amount of volume of transactions that would be lost as a result of increased costs or taxes.

We will now go further: extending stamp duty reserve tax along the lines recommended in ‘Reinforcing Resilience: Making the UK a Citadel of Long-Term Finance,’ i.e. to forex spot and derivatives trades, interest rate derivatives, and commodities spot and derivatives trades at 50% of transactions costs. A discount of one-third will apply to financial firms, because financial firms have lower transactions cost. A similar elasticity methodology is used to that used in 2017, leading to an estimate that £2.1 billion will be raised annually by extending the financial transactions tax to these trades, on 2016-17 data.

An exemption will apply to interest rate derivatives under three months’ maturity (to avoid cashlike transactions), and for the first £1,000 of foreign exchange transactions daily per market participant. There should be no impact on the costs that ordinary people face for their foreign exchange at bureau de change.

This comprehensive financial transactions tax should help to contribute to less volatile shortterm trading as well as raising £8.8bn in 2023-24 after adjusting in line with financial sector profits growth.

[The document also sets out why Labour believe the tax would be hard to avoid.]

Review of corporate tax reliefs

The next Labour government will conduct a review of corporate tax reliefs… with a target of reducing them by £4.3bn. The review will assess the hundreds of corporate tax expenditures which make up some of the billions forgone through tax expenditures and structural reliefs by the UK every year.

The review will be conducted by the Treasury. It will be informed by an expert panel which will invite representatives of HMRC, the Office of Tax Simplification, the National Audit Office, and external stakeholders including trade union representatives, business organisations and taxation experts such as the CIOT, AAT and ICAEW.

The review will examine the body of corporate tax reliefs for its effectiveness against their stated aims and compared with alternative policy measures to achieve these aims. It will also seek to ensure stronger transparency and accountability concerning the creation and maintenance of corporate tax reliefs. It will not include major structural reliefs such as the personal allowance.

Full details can be found in ‘Labour’s Review of Corporate Tax Reliefs’.

Reforming funding for research and development

Both the Institute for Innovation and Public Purpose and the IPPR have been critical of the effectiveness of blanket tax reliefs for research and development… [Document quotes these criticisms]

Both have recommended the abolition of the Patent Box. Labour will gradually move to a system of more direct funding, with investment provided through our National Transformation Fund and our independent National Investment Bank’s innovation arm. As a result Labour will phase out R&D tax credits for large corporations and the Patent Box over this Parliament (while keeping the R&D tax relief SME scheme). Savings from this are estimated from HMRC’s ‘Estimated costs of non-structural tax reliefs’ spreadsheet.

Bank Levy

The Office for Budget Responsibility’s ‘Policy Measures Database’ from March 2019 estimates the cost of the Conservatives’ 2015 cuts to the Bank Levy at £1,292m in 2023-24.

Land, property and inheritance taxation

The manifesto says –

  • A Labour government will review the option of a land value tax on commercial landlords as an alternative to business rates and develop a retail sector industrial strategy.
  • Introduce a levy on overseas companies buying housing, while giving local people ‘first dibs’ on new homes built in their area.
  • Give councils new powers to tax properties empty for over a year.

The costings document includes the following costings for this area –

Other
Reverse cuts to inheritance tax; introduce a second homes tax: [Part of a group of ‘Other’ changes which would raise £5.2 billion between them]

The costings document adds –

Second homes tax

This is an annual levy on second homes that are used as holiday homes equivalent to 200% of the current council tax bill for the property. Based on the following sources and work from the House of Commons Library we estimate it could currently raise up to £560m a year…

The council tax database indicates that as of October 2018 there are 251,654 properties classed as ‘second homes’ for council tax purposes in England…

Inheritance Tax

Labour will reverse George Osborne’s Inheritance Tax cut which, according to reports was described by Treasury analysis as being “most likely benefit high income and wealthier households”. The Spring Budget 2017 (Table 2.2) estimate for its cost rose to £725m in 2021-22, which is uprated for nominal GDP growth as used in the Office for Budget Responsibility’s ‘Policy measures database’ (March 2019).

NB. The Offshore Property Company Levy is part of Labour’s Fair Tax Programme, covered below under ‘Tackling Avoidance and Evasion’.

VAT and other indirect taxation

The manifesto says –

  • VAT is a regressive tax that hits the poorest hardest and we guarantee no increases in VAT.
  • Close the tax loopholes enjoyed by elite private schools and use that money to improve the lives of all children.

The costings document includes the following costings for this area –

Other
Impose VAT on private school fees: [Part of a group of ‘Other’ changes which would raise £5.2 billion between them]

The costings document adds –

VAT on private school fees

According to the Oxford Economics report ‘The Impact of Independent Schools on the UK Economy’, Independent Schools Council schools received £7.83bn for “core school operations” in 2017. Applying the same assumptions on elasticity of demand as in our funding for new state school places suggests a reduction in tax base to around £7.4bn and therefore a potential tax yield of just under £1.5bn.

As VAT-payers, private schools would be able to reclaim VAT on VAT-able expenses, but most outgoings relate to staff. Figure 11 of the Oxford Economics report suggests £189m of taxes on school purchases were paid, which is an upper bound on the VAT that could be reclaimed. Deducting that and adjusting upwards for the fact that only 85% of independent schools are ISC schools gives a potential yield just over £1.5bn for 2017 which is adjusted for school fee inflation in 2018 and 2019 and inflation forecasts going forwards.

Tackling avoidance and evasion

The manifesto says –

  • Launch the biggest ever crackdown on tax avoidance and evasion and reform the inefficient system of tax reliefs.

The costings document includes the following costings for this area –

Tackling tax avoidance and evasion
Fair Tax Programme: £6.2 billion

The costings document adds –

Labour’s Fair Tax Programme

A Labour Government will enact the most comprehensive tax transparency and avoidance programme ever enacted in government. This will be a powerful package of legal reforms, resourcing changes, and government-wide reviews and inquiries – all with the aim of changing the culture that surrounds taxation, so that tax is viewed as a contribution and tax avoidance is not tolerated.

It includes firstly a set of measures to improve transparency, including through public registers, an inquiry into the finance sector, an Excessive Pay Levy, and greater scrutiny of MPs. The second part provides stronger law, enforcement, and support for HMRC. It commits to clamping down on enablers of tax avoidance and evasion, as well as avoiders and evaders themselves, and to transforming the power and resources of HMRC. Eliminating legal loopholes is a third priority, and the fourth part focuses on cross-border action on avoidance and evasion, including action on tax havens and coordinated action on tax justice.

We have costed some of these measures but erred on the side of caution. We have not assumed income from measures that could well raise significant revenue, such as the scrapping of ‘nondom’ status, because we believe tax policy should be evidence-based and we currently lack the evidence base to make precise predictions about potential yields. In other cases, as with the Excessive Pay Levy, where there is significant uncertainty about behavioural response, we have also erred on the side of giving no costing.

Those policies we have estimated yields for are:

  • More targeted audits by HMRC
  • Offshore Property Company Levy

For background assumptions and methods for arriving at these yields, along with the full policy proposals, see ‘Labour’s Fair Tax Programme’. [NB. We have not been able to find this document so far.]

Other tax proposals

The manifesto says –

  • For small businesses, we will ensure no quarterly reporting for businesses below the VAT threshold.

  • A Labour government will review the tax and pension changes implemented by the Tory government to ensure that the [health and care services] workforce is fairly rewarded and that services are not adversely affected.

  • A levy for problem gambling funding.
  • Build community wealth by giving communities the powers and resources they need to keep public spending circulating in the local economy, rather than being sucked offshore to corporate tax havens.

Tackle Poverty and Inequality (selected proposals)

Work

  •  ‘Rapidly’ introduce a Real Living Wage of at least £10 per hour for all workers aged 16 and over, and use savings to public finances to help small businesses manage the extra cost
  • Requiring large companies to set up Inclusive Ownership Funds (IOFs). Up to 10 per cent of a company will be owned collectively by employees, with dividend payments distributed equally among all, capped at £500 a year, and the rest being used to top up the Climate Apprenticeship Fund. The cap will rise to ensure that no more than 25 per cent of dividends raised by IOFs are redistributed in this way.
  • Explore other innovative ways of responding to low pay, including a pilot of Universal Basic Income.
  • Annual income assessments for those on universal credit.
  • Ending bogus self-employment and creating a single status of ‘worker’ for everyone apart from those genuinely self-employed in business on their own account, so that employers cannot evade workers’ rights; and banning overseas-only recruitment practices.
  • Banning zero-hour contracts and strengthening the law so that those who work regular hours for more than 12 weeks will have a right to a regular contract, reflecting those hours.
  • Giving all workers the right to flexible working.
  • Develop collective income protection insurance schemes for the self-employed
  • Reduce average full-time weekly working hours to 32 across the economy, with no loss of pay, funded by productivity increases.
  • Labour will also introduce a new, unified Workers’ Protection Agency to enforce workplace rights, including the Real Living Wage.
  • Amend the Companies Act, requiring companies to prioritise long-term growth.

Social security

  • Replacing the DWP on day one with a Department for Social Security, ‘which will be there to help and support people, not punish and police them’.
  • Scrap universal credit: ‘we will immediately stop moving people onto it and design an alternative system that treats people with dignity and respect’. Implement an emergency package of reforms to mitigate some of the worst features of universal credit while Labour develop its replacement system.
  • End the five-week wait by introducing an interim payment based on half an estimated monthly entitlement.
  • Scrap the benefit cap and the two child limit.
  • Labour will end the digital barrier and offer telephone, face-to face and outreach support. A Labour government will recruit 5,000 additional advisors to deliver this.
  • Labour will abandon the Conservative’s plans to raise the State Pension Age, leaving it at 66.
  • Establish an independent Pensions’ Commission, modelled on the Low Pay Commission, to recommend target levels for workplace pensions.
  • Create a single, comprehensive and publicly run pensions dashboard.
  • Ensure that the pensions of UK citizens living overseas rise in line with pensions in Britain.

Rebuild our public services (selected proposals)

  • Take back all PFI contracts over time
  • When services are procured from the private sector, companies will be assessed against best practice public service criteria, including provisions for collective bargaining, fair wage clauses, adherence to environmental standards, effective equalities policies, full tax compliance and application of pay ratios.
  • In the public sector, Labour will enforce maximum pay ratios of 20:1.
  • Alcoholic drinks will be labelled with clear health warnings. We will review the evidence on minimum pricing.
  • Within five years, all two, three and four-year olds will be entitled to 30 hours of free preschool education per week and access to additional hours at affordable, subsidised rates staggered with incomes. Labour will also work to extend childcare provision for one-year-olds.
  • A Business Development Agency will be based in the Post Bank, providing free support and advice on how to launch, manage and grow a business.

Other policy (selected proposals)

  • Labour will secure a revised EU Withdrawal Agreement. Once Labour have secured this new deal it will put it to a legally binding referendum alongside the option of remaining in the EU within the first six months of a Labour government.
  •  A Labour negotiated Brexit deal will be based on principles including: a permanent and comprehensive UK-wide customs union; close alignment with the Single Market; dynamic alignment on workers’ rights, consumer rights and environmental protections; continued participation in EU agencies and funding programmes.
  • Ask the Office for Budget Responsibility (OBR) to incorporate climate and environmental impacts into its forecasts so that the cost of not acting will be factored into every fiscal decision.
  • Placing the National Transformation Fund Unit, a key part of the Treasury, in the North of England and build up the regional offices of government in each of the nine English regions.
  • Network of Regional Development Banks, to provide £250 billion of lending for enterprise, infrastructure and innovation over 10 years.
  • Labour will change how politics is funded, banning donations from tax avoiders and tax evaders, and closing loopholes that allow the use of shell companies to funnel dark money into politics.
  • Promote fairer international tax rules and help countries in the Global South build progressive tax systems to finance essential public services.

The full manifesto can be found here.

Report by George Crozier  and Hamant Verma

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