What would Labour do? Which tax proposals remain 'on the table' after the UK Spring Budget?

The UK Labour Party set out a range of tax policy pledges with the launch of its Business Partnership for Growth plan in February, highlighting those it wishes to maintain and stabilise while leaving "on the table" previous pledges to levy VAT and business rates on private schools, introduce a "proper" windfall tax on the profits of energy giants and abolish the carried interest "loophole".

Labour, in the Business Partnership for Growth plan, highlights that "stability" for the economy is key to drive growth and so, unsurprisingly, said more about the taxes it would maintain as opposed to increase (or decrease). The importance of economic stability to drive growth was again reinforced by the shadow chancellor, Rachel Reeves, in her Mais lecture to a City of London audience this week on 19 March.

Previously, the shadow chancellor, in a speech at the Labour Party conference in October last year, set out her tax priorities and outlined what tax measures could be expected under a Labour government.

However, with the chancellor in the Spring Budget on 6 March adopting two of the opposition's tax policies – the reform of the non-domicile "non-doms" regime and the extension of the windfall tax on energy super profits – Labour may look to find alternative tax rises or spending cuts to fund its spending pledges.

Tax pledges

In the Business Partnership for Growth plan, Labour said that it would:

• Cap the headline rate of corporation tax at 25% for the lifetime of the next Parliament.
• Retain permanent full expensing for capital investment and the annual investment allowance. It would also publish detailed guidance on what investment qualifies for each regime to provide much greater clarity to firms looking to invest.
• Maintain the current structure of R&D tax credits over the next Parliament and maintain the patent box regime.
• Support and continue to implement Pillar One (the fair taxation of digital multinationals) and Pillar Two (a global minimum rate of corporate taxation) of the Organisation for Economic Co-operation and Development's international reform of large multinational businesses.
• Explore greater use of rulings and clearances for major investment projects – to provide more certainty to businesses of the tax treatment of the investment.
• Replace business rates with a new system of business property taxation.
• Turn the Apprenticeship Levy into a more flexible growth and skills levy.
• Review the pensions landscape.

Labour has also said it would hold the Budget in the final two weeks of every November (at least four months before the new tax year) and a restated forecast – a spring statement – in the first two weeks of March. This is a reversal of the current Spring Budget and Autumn Statement arrangement. Labour said it would also publish a business tax roadmap in the first six months of its government.

Labour also said in its plan – which Rachel Reeves reiterated in the Mais lecture –  that it would strengthen the Office of Budget Responsibility, guaranteeing in law that any government making significant and permanent tax and spending changes will be subject to an independent forecast from the OBR. 

The shadow chancellor also announced in the Mais lecture that the Treasury's Enterprise and Growth Unit should be more involved in decision making for fiscal events and spending reviews.

Taxation of carried interest

Labour has been vocal in its plan to abolish the carried interest "loophole" (under which fund managers are taxed on the receipt of carried interest as capital attracting a 28% rate rather than an income tax at a rate of 45% for the highest earners).

There has, however, been rising pressure from the private equity industry that a move to tax carried interest at income tax rates would force private equity firms to relocate outside of the UK, reduce the UK's attractiveness for funds with carried interest partners and could have a serious impact on the UK economy.

Most recently, on 8 March 2024, the Treasury published an opposition policy costing document on Labour's carried-interest policy claiming that it would cost the Exchequer £3.3bn over the life of the next Parliament (five years).

The shadow chancellor could, therefore, face mounting pressure to water down Labour's proposal – perhaps by taxing carried interest at a rate of between 28% and 45%.

Non-dom tax regime

The chancellor, Jeremy Hunt, announced in the Spring Budget that the favourable remittance-based tax regime for non-doms will be abolished and replaced with a new regime from 6 April 2025 (with favourable transitional arrangements for existing non-doms claiming the remittance basis). The government will also consult on moving to a residence-based regime for inheritance tax for non-doms – to take effect no earlier than 6 April 2025.

As a result, Labour may rethink its flagship non-dom proposals (which it had previously said would raise £2bn of revenue for its spending commitments including support for NHS). Should Labour form the next government, it is likely (in keeping with its pledge to maintain stability) to adopt the non-dom measures for its first budget (none of which will be included in the Spring Finance Bill), but could well consider the transitionary provisions overly generous (and so amend those). It would be unusual to include that level of detail in an election manifesto, so the true picture may not emerge until the next budget.

Windfall tax on energy super profits

Labour had pledged to increase the term of the Energy Profits Levy (EPL), the temporary windfall tax on oil and gas companies (which is currently an additional 35% tax on top of the existing 40% headline rate of tax for those companies) by an additional year (to 31 March 2029), increase the rate to 38% and backdate the EPL to the start of 2022.

Although the Spring Budget adopted Labour's policy to extend the EPL to March 2029, the rate was not increased. Labour has, however, itself announced that it has dropped the proposal to backdate the policy to the start of 2022. So there is still an element of Labour's tax proposal which remains on the table.

Osborne Clarke comment

Alongside Labour's previous announcements that there will be no wealth tax, no increase in the rate of capital gains tax and no increase to the top rate (45%) of income tax and now (following the publication of the Business Partnership for Growth plan) no increase in corporation tax, might Labour look to change exemptions and reliefs for those taxes instead? As Rachel Reeves has previously said she would look into "every single tax break" in Britain, reliefs and exemptions for other taxes such as VAT might also be on her radar.

One common theme coming from Sir Keir Starmer in his statements and interviews is his desire not to increase the burden on working people, whether it comes to tax or anything else, so perhaps instead of employment income he might have rental or investment income in his sights as a potential area for tax rises?   

Labour has also said that it would consider reintroducing the lifetime allowance for pensions following its abolition by the current government from 1 April 2024. This seems to support Labour's statement in Business Partnership for Growth plan that it would review the pensions landscape.

We do not yet have a Labour election manifesto. However, we can expect to see the tax pledges that Labour has in some form already announced to be reflected in the manifesto when it is published – possibly over the coming months – alongside other plans it may have that address the gap left by the announcements in the Budget.