What businesses can expect from the Labour Government

After an intensive six-week campaign, the Labour party has been elected to Government with a majority of 172 seats. This article explores what businesses can expect to see on tax policy from the new Chancellor of the Exchequer, Rachel Reeves.

It is one of a series of three articles on tax policy and the new Government in this edition of Tax Matters Digest – see also what what employers can expect and what individuals can expect.

Until Reeves delivers her first Budget (the date of which we expect to be announced before summer recess), the Labour manifesto is currently the most reliable indicator of policy under the new Government. Reeves reiterated in her maiden speech as Chancellor on 8 July 2024 that she would be sticking to her manifesto commitments.

The manifesto, however, was light on detail on tax and so in this article we consider previous statements from Labour that may provide insight into the future direction of travel beyond manifesto statements.

Overall, the key message from Labour’s manifesto was that there were going to be few radical changes for business tax. The manifesto committed to maintaining existing key planks of the business tax system. It committed to cap the corporation tax rate at the current level of 25 percent for the course of the next Parliament, although it indicated that the rate might reduce if tax changes in other countries posed a risk to UK competitiveness.

The manifesto states that Labour will retain permanent full expensing for capital investment. The document was silent on extending full expensing to leased assets, however Labour has previously said that it would consider the outcome of the Conservative Government’s technical consultation in this area.

The manifesto stated that Labour will retain the Annual Investment Allowance (AIA) for small business.

Although it did not feature in the final manifesto, it is worth noting that in early 2024 Labour said it would maintain both the research and development (R&D) tax credit and Patent Box regimes. It has also previously said that it would maintain capital allowances at least at their current level of generosity.

The manifesto pledges continued support for the implementation of the Global Minimum Tax and the introduction of a Carbon Border Adjustment Mechanism. 

There are, however, a number of areas where Labour intends to depart from the status quo:

• Further supporting its intention to give more stability and certainty on business tax, the Labour manifesto promises a Business Tax Roadmap (the Roadmap) for the next Parliament which is intended to allow businesses to plan investments with more confidence. Although not set out in the manifesto, Labour previously stated that we could expect the Roadmap to be published in its first six months of Government and it would provide clarity on any scheduled changes to corporation tax reliefs and capital allowances for five years, including setting out a timetable for planned reforms;
• The manifesto also commits to giving firms greater clarity on what qualifies for allowances to improve business investment decisions. Earlier statements from Labour that didn’t make it into the manifesto included asking HMRC to publish simple and comprehensive lists of all assets eligible for each type of investment allowance and exploring the greater use of written rulings and clearances on the tax treatment of certain investments;
• One of Labour’s flagship tax raising policies is the extension of the existing Energy Profits Levy (EPL). The manifesto set out plans to extend the sunset clause in the EPL until the end of the next Parliament and increase the rate of the levy by 3 percentage points (from 75 percent to 78 percent). Labour will remove “the unjustifiably generous investment allowances” from the EPL. It remains to be seen what this means in practice and the industry is closely monitoring this point. Also, Labour will retain the Energy Security Investment Mechanism; and
• The manifesto reiterates previous Labour statements to replace the Business Rates system in England, levelling the playing field between high street and online retailers. This will be done in a revenue neutral way and will better incentivise investment, tackle empty properties and support entrepreneurship. Business rates reform has proved notoriously difficult in the past. In her maiden speech Reeves made it clear that she was willing to tackle the difficult issues. That sentiment will be necessary if the Labour Government is to deliver on its promise to reform this area.

Large businesses should take particular note of the manifesto pledge to tackle the tax gap by modernising HMRC, investing in more HMRC staff focused on compliance, and changing the law to tackle tax avoidance. Labour has committed to increasing registration and reporting requirements, strengthening HMRC powers, investing in new technology and building capacity within the tax authority. Although HMRC’s official tax gap reports regularly show that large businesses are not a major contributor to the tax gap, the manifesto states that there will be particular focus on tax avoidance by large businesses so that taxpayer group may need to prepare themselves for heightened scrutiny from HMRC in the coming years.

To further promote stability, Labour has committed to holding one fiscal event per year. The date of Labour’s first fiscal event has been the subject of intense speculation among businesses. Reeves has confirmed that she will announce the exact date before the Parliamentary summer recess in a few weeks’ time. She has made it clear that this Budget – and all future fiscal events - will be subject to an independent OBR forecast. OBR forecasts take at least 10 weeks to prepare, meaning the earliest a Budget could happen is mid-September but this would risk running into the busy party conference season. Our expectation is that the Budget will take place in November: Labour previously said its one fiscal event per year would take place in the last two weeks of that month and a date in late November would give a bit more breathing space to assess the public finances, particularly in light of the impending Spending Review.

Overall, the manifesto sought to deliver a ‘steady as she goes’ message on tax to reassure businesses and encourage investment. However, the real test for the Labour Government will come in delivering on its commitments in the midst of some of the most challenging economic conditions since the Second World War. The first Labour Budget will be one of the most anticipated in recent memory. However, businesses may have to wait a few months until more is revealed.

For further information please contact:

• Sharon Baynham
• Stefanie Redmond