GK Associate Joshua Owolabi assesses how a Labour government might approach business taxation.
Ever since Sir Keir Starmer became the Leader of the Opposition, the Labour Party has more readily embraced the attitudes towards growth that are usually associated with the Conservative Party. The Shadow Chancellor Rachel Reeves, and Shadow Business Secretary Jonathan Reynolds have been keen to keep business leaders on side.
In its manifesto, published on 13 June, the Party emphasised the need to create conditions that allow investors and businesses to engage in more long-term planning. As a result, Labour has pledged to publish a roadmap for business taxation to create more certainty regarding the tax regime. Labour also plans to cap corporation tax at the current level of 25% for the duration of the next parliament and has promised to act if tax changes abroad “pose a risk to UK competitiveness”.
Labour’s “pro-growth and pro-worker” mantra will be tested by the challenges of governing, should Labour win a majority on 4 July. While Reeves has insisted that she has no plans to increase Capital Gains Tax (CGT), a pledge reiterating that stance was a notable omission from the Party’s manifesto. This suggests Labour may be open to raising CGT rates in government if it needs additional revenue to support its policy plans.
Labour’s manifesto pledge on carried interest also belies its attempts to win over the business community. The Party has now confirmed that it would close the ‘carried interest loophole’, which currently allows private equity fund managers to pay CGT on their profits (at a rate of 28%), rather than income tax (which has a top rate of 45% plus national insurance).
Reeves has long been in favour of this. In her response to Chancellor Jeremy Hunt’s 2022 Autumn Statement, she chided him for his decision not to close the loophole – stating that ‘ordinary hard-working people’ would have to pay more tax, as a proportion of their incomes, than fund managers.
However, just a few days after the launch of Labour’s manifesto, Reeves signalled Labour would continue the UK’s favourable tax treatment in instances where fund managers put their own capital at risk.
Reeves told the Financial Times that it is “appropriate” for capital gains tax, rather than income tax, to be paid on the money made on successful deals if fund managers invest their own money. A future Labour government is likely to launch a consultation on its carried interest proposal before implementing any changes. This will allow Labour to set out the finer details of the proposal, including any exemptions.
A big clash with the private equity industry could put Labour in a difficult position and could hinder Starmer and Reeves’ attempts to present Labour as pro-growth. It will be keen to prevent investors moving to countries where carried interest is taxed at a lower rate, given historical criticisms the Party has faced about its ability to manage the economy and support the business community. However, the proposed change to carried interest is one of the few tax rises on higher earners included in Labour’s manifesto. If the Party was to renege on this pledge, it could risk undermining its message on fairness. More importantly, given the key motive behind the carried interest pledge is the desire to keep working class voters on side, Labour could risk upsetting its core voter base if it does not follow through. Ultimately, Labour’s actions on carried interest will indicate the extent to which it is able to prioritise both growth and fairness.