Changes to major taxation for businesses and thresholds
Two commitments from the Labour manifesto are worth pointing out. The headline grabber so far has been the proposed freeze to corporation tax at 25%. But that doesn’t mean there won’t be other changes. Labour has committed to publishing a roadmap for business taxation within six months of the election, and we can expect this on Budget day.
A major component of that roadmap could be the much talked about rises in Employer National Insurance contributions. Labour’s manifesto vowed not to raise income tax on employment income or National Insurance Contributions (NIC), but the wording didn’t mention employer NIC. The public speculation so far has focused on three ways in which the Chancellor may do this:
- Extending employer NICs to employer pension contributions
- Increase the employer NICs from 13.8% (to something like 15%)
- Changing the threshold at which employer NIC becomes chargeable (currently charged when an employee earns more than £9,100 a year)
Any of these would imply net increases to the costs that businesses incur through NICs.
Scrapping Business Asset Disposal Relief
Business Asset Disposal Relief (BADR) reduces the amount of Capital Gains Tax (CGT) on a disposal of a business, such as when shareholders decide to wind down a business for retirement purposes.
In the run-up to the 2019 General Election, HMRC reported that 9,000 people paid £5.1bn in tax on £33.7bn of capital gains. That implies an average tax rate of 14.8% – much lower than the basic rate income tax of 20% that a worker on an average salary would earn.
Might the Chancellor, and the Labour leadership more widely, wish to address this imbalance by scrapping BADR altogether?
Confirmation on R&D credits and other investment support
The Labour manifesto did not discuss the Research & Development (R&D) regime for business, but since coming to power Rachel Reeves confirmed that she will maintain the current rates of R&D, thereby supporting innovation.
Additionally, we think businesses can expect some certainty around both the Full Expensing (FE) and £1m cap to the Annual Investment Allowance (AIA). And with no deadline for when these allowances will expire, businesses can arguably better plan for and time the investments that are crucial for their businesses.
Support for further devolution and regional taxation
Labour’s manifesto pledged further devolution of powers to local authorities, city mayors and regional bodies. And it has vowed to change business rates in order to help revitalise the High Street. The two may combine, but in practice, how?
Some have suggested it may mean replacing business rates with a local business tax levied by local and unitary authorities. I expect this would boost local investment and support some of the ‘levelling up’ efforts as pursued by the previous government.
