George Bull 17 May 2017 11:03am

The tax gamble at the heart of Labour's manifesto

It’s out! After leaks which may have been unintentional but did seem to test the water to see how a wider public would react to draft proposals, we finally know what’s in the Labour Party manifesto

Caption: George Bull dissects Labour's promises ahead of the crucial election on 8 June.

As we had all been led to expect, taxing and spending are at the heart of the manifesto, driven by a combination of political ethos and social purpose intended to win over voters. Whether that overall aim will succeed will be known on 9 June. For now, let’s look at the tax part of the manifesto.

By 2021/22, Labour intends to increase taxes by £48.6bn per year. Using the 2017/18 estimate from the Office for Budget Responsibility, public sector receipts from taxes - excluding business rates and council tax - are currently running at £628bn. Labour's manifesto proposal will increase this to £676bn, the UK’s highest ever tax burden.

A document published alongside the manifesto contains information on the costing of the various manifesto spending commitments, with the aim presumably of deflecting criticism by showing how those costs will be funded through the tax system. This analysis does not include the cost of renationalising public utilities such as water, energy systems, train companies and the Royal Mail.

The tax headlines however are clear:

- 45p income tax rate to apply above £80,000 (not applicable in Scotland)

- 50p income tax rate to apply above £123,000 (not applicable in Scotland)

- “Fat cat tax” to be paid by companies, at a rate of 2.5% on an individual’s earnings above £330,000, and 5% above £500,000

- Stamp duty reserve tax be extended to a wider range of assets (the “Robin Hood tax”).

Once the existing loss of personal reliefs on income above £100,000 is taken into account, along with National Insurance, people with incomes over £100,000 can expect to pay an effective rate of some 62%. Above £123,000, that drops to around 52%. For these taxpayers, Tax Freedom Day will be postponed to October!

It’s not all increases, though. The Labour Party promises there will be no increases in income tax for those earning less than £80,000 a year, and no hikes in National Insurance contributions or the rate of VAT. This covers 95% of taxpayers, leaving the headline increases to be borne by the top 5% of earners and by larger companies.

The message for companies, at least in respect of the corporation tax rate, is more complex. Against a background of assurances that Labour will keep “UK corporation tax among the lowest of the major developed economies”, the main rate of corporation tax will increase to an eventual rate of 26%. At the same time, the lower rate of corporation tax for small companies will be reintroduced.

Clearly, such a massive tax shake-up will create enormous uncertainty. The party seems to go some way towards recognising this, with a deduction of £3.9bn per year from the tax take to recognise “additional behavioural change and uncertainty”.

In a move which many will welcome, small businesses will be excluded from “plans to introduce quarterly reporting and take action (sic) on late payments”. Labour declares itself keen to support businesses which are “doing the right thing”.

On the subject of doing the right thing, the manifesto contains several references to a further clamp-down on tax avoidance, along with suggestions that renewed efforts will be made to bring tax evasion and the damaging effects of the shadow economy under control. HMRC will receive more resources to do this.

Labour also plans to retain the benefits of the single market and the customs union.

Among its commitments to workers’ rights, the party plans to ban payroll companies, sometimes known as umbrella companies, which can be used to reduce employers’ tax liabilities while limiting workers’ rights.

Leaving aside concerns as to whether the spending plans have been fully costed, with suitable funding identified, this takes us to the heart of what looks like a gamble in the tax proposals: that the top 5% of British taxpayers and larger companies can and will pay an extra £48.6bn per year without undermining the economic health of the nation.

In its proposed tax reforms, the US is relying on the well-known Laffer proposition: by reducing taxes, a government can successfully stimulate the economy and bring prosperity to all. The Labour Party seems to be hoping that, even though it plans to increase tax by around 7% of GDP, it can bring about economic growth, social justice and a better life for all. Time will tell whether the US has got it right, or whether the balance goes in favour of Labour. But they can’t both be right.

George Bull is RSM's senior tax partner