What does a Labour Government mean for Accountants?

The Labour Party has won a majority in the 2024 General Election. Their manifesto promised ‘Change’ and the new prime minister, Sir Keir Starmer, is now starting to form his cabinet, including the likely appointment of Rachel Reeves as the UK’s first female chancellor of the exchequer.

After 14 years in opposition, our new prime minster describes a 'changed Labour party, ready to serve our country, ready to restore Britain to the service of working people'.

As an accountant or UK tax professional, you know that the new government will trigger a new direction for tax planning, compliance and business advice for the next parliament. Capital gains tax and inheritance tax will certainly be topics to watch over the months ahead, as clients seek to avoid large tax bills.

In this article we highlight the key impacts for accountants and likely discussion and planning points they will be raising with their clients in light of the general election results. Is there really a 'sunlight of hope' as promised by Starmer?

If you are an accountant in practice or industry and would like more information about becoming a 20:20 Innovation member, why not book a free 30-minute demo with our team today.

What will happen next?

The new Parliament has been called to meet on Tuesday 9 July 2024, when the business will be the election of the Speaker and the swearing-in of members.

The State Opening of Parliament and The King’s Speech will follow on Wednesday 17 July 2024. This is expected to include legislation that will facilitate the OBR (Office for Budget Responsibility) independently publishing forecasts of any fiscal event involving major tax changes, immediately drawing a line between Labour and the detrimental unfunded ‘mini-budget’ presented by previous Conservative chancellor Kwasi Kwarteng, in September 2022.

The King’s Speech is also likely to include significant employment law reforms, affecting employers throughout the UK.

When will the Labour Party present their first Budget?

Reeves has been clear that she would not deliver a fiscal event without an OBR forecast. Allowing for the minimum of 10 weeks' notice, the earliest time would be the week commencing 16 September 2024.

Whether falling in September or October, we can expect the date to be announced soon.

Thereafter, Labour have committed to just one major fiscal event a year, giving families and businesses due warning of tax and spending policies. The 'major fiscal event' would presumably continue to be delivered in the Autumn, allowing time for a Finance Bill to be scrutinised and then receive Royal Assent before the following 5 April.

What tax policies will we see under a Labour government?

Taxes that will not be increased

The basic, higher and additional rates of income tax will not be increased. The income tax thresholds (including the personal allowance, basic rate and higher rate bands) are likely to remain fixed at their current levels.

As for income tax, there will not be an increase in the rates of National Insurance Contributions (NICs) or VAT.

In terms of business tax, a roadmap for the next parliament (up to 5 years) will be published, enabling confident investment planning. For capital investment, the permanent full expensing system and the annual investment allowance to be retained. There will be greater clarity on qualification criteria, to aid investment.

We know that income tax, national insurance contributions and VAT rates will not be increased. Increasing the tax burden in other areas is not prohibited in the Labour Party manifesto, albeit the Party has routinely stated during the general election campaign that nothing in their plans requires any additional tax to be increased.

Here we could explore where tax increases could come, later in the course of parliament, if not now.

We know that corporation tax will be 'capped' at the current main rate of 25% for the next parliament. Companies currently benefiting from access to the small profits corporation tax rate of 19% and those deducting marginal relief from their corporation tax liability should perhaps be poised for increases.

VAT categorisation will be reviewed and, as widely reported, private school fees will become standard rated. Please refer to our previous article for commentary on the impact on this.

Capital gains tax exemptions will be removed for private equity executives (namely the removal of the ‘carried interest’ rule). There is also much speculation about further increases (or relief restrictions) in capital taxes – capital gains tax and inheritance tax – as these were not ruled out in the Party manifesto. Whether any such increases would come in the initial or later Budgets, or as in-year 2024/25 increases or later, is not yet clear but already reports are surfacing of wealthy individuals selling capital assets before any such tax raid takes place.

We can expect an end to the use of offshore trusts to avoid inheritance tax.

Non-dom tax loopholes will be abolished and replaced with a ‘modern scheme for people genuinely in the country for a short period’. How similar this will look to the ‘Foreign Income and Gains (FIG)’ non-dom regime announced by the Conservatives and due to take effect from April 2025 is yet to be seen.

SDLT on purchases of residential property by non-UK residents will increase by 1%. This will increase the existing surcharge from 2% to 3%.

The Conservative Party had previously announced an end to Furnished Holiday Lettings (FHLs) tax breaks from April 2025 but had revealed very little detail. Labour have yet to comment on this matter but it is widely expected that they too will abolish the regime.

Tax compliance

The Making Tax Digital (MTD) initiative did not get a mention in the Labour manifesto but in their ‘Plan to Close the Tax Gap’ they say:

"An effective digital tax system will improve the experience for individual taxpayers, reduce the tax gap, and drive productivity gains for businesses. Digitisation would also free up HMRC resources to focus on improving the experience of the tax system for taxpayers, dealing with more complex cases and supporting the digitally excluded. HMRC’s progress in digitisation has delivered some benefits, but according to the National Audit Office, there have been very substantial delays, costs have increased, and HMRC has not demonstrated value for money. Labour will work with businesses, the tax profession and digital service providers to bring a new focus to HMRC’s modernisation, including greater use of AI – learning from industry and best practice overseas to make sure its scope is ambitious, whilst having new, achievable timescales for delivery."

It seems the MTD roadmap is certain to be progressed, to include eventual inclusion of partnerships and companies as well, but the timelines are potentially up for review with the start date of April 2026 now in question, alongside the specific category of taxpayer mandated in from that date.

Tax avoidance

We can expect plans to modernise HMRC, alongside legislative changes to tackle tax avoidance. Labour have previously pledged a renewed focus on tax avoidance by large businesses and the wealthy.

Registration and reporting requirements will increase and HMRC’s powers will be strengthened.

Pension contributions

Pension reform is planned, alongside a review of the pensions landscape. It is not thought at this stage that there are plans to restrict income tax relief on pensions but there is scope for the new chancellor to amend the surrounding framework.

What other advice will accountants need to give to their clients?

Starting with the King’s Speech on 17 July 2024, a new plan to ‘Make Work Pay’ will overhaul HR practices, affecting all UK employers.

The minimum wage will be reviewed as part of this, ensuring a ‘genuine’ living wage and the removal of the age bands.

England’s business rates system to be replaced with a fairer model, levelling the playing field between the high-street and online ‘giants’. Business rates will start to apply to private schools.

Can 20:20 Innovation help post-election?

Absolutely!

This will start on 15 July 2024, with our webinar 'Finance (No 2) Act 2024 and Post Election Tax Review'. Renowned expert Rebecca Benneyworth will consider Labour's plans and the immediate implications for taxation compliance, planning and advice. This will include consideration of the impact on small businesses and higher rate taxpayers.

We will also provide ongoing commentary and guidance in our Monthly Tax Update and Practice Insight webinar series.

Content for accountants to use in communicating to and advising their clients will also continue to be provided in our exclusive 20:20 Innovation members’ weekly Business News newsletters.

Looking ahead to the post-election Budget, we will stand ready with our usual and highly-regarded range of Budget support. This includes our branded Budget PDF newsletter for accountants in practice to provide to their clients and our rapid reaction webinar, aimed exclusively at accountants in practice and designed to complement the newsletter and equip them to advise their clients on the subjects discussed in the newsletter.

Accountants can also provide the 20:20 Innovation ‘Tax Rates Guide’ to their clients. This helpful persona-led guide will be updated for any in-year 2024/25 tax changes.

Further reading

In this section we consider where and how a new chancellor may seek to raise funds via capital gains tax and inheritance tax.

Capital gains tax

Capital gains tax rates currently range from 10% to 24%. This is notably less than the main income tax rates that range from 20% to 45%. We might see the Labour government look to narrow this gap by increasing the capital gains tax rates. This would affect those making disposals of capital assets that are not covered by an exemption.

There are also a number of capital gains tax reliefs, including business asset disposal relief and a low 10% rate of capital gains tax for qualifying business disposals, that could be reviewed and restricted going forwards.

Inheritance tax (IHT)

Relatively few individuals and families currently pay IHT due to the £325,000 nil rate band and extended £175,000 residence nil rate band. The Labour government may look to review reliefs, such as business relief, to increase estate values subject to the tax. This could be part of a 'wealth tax' initiative, although such plans were frequently denied by the party during the election campaign.

We already know that the Labour government will make changes to ensure assets held in offshore trusts do not escape the inheritance tax regime.

If you are an accountant in practice or industry and would like more information about becoming a 20:20 Innovation member, why not book a free 30-minute demo with our team today.