Election Commentary on Corporate Tax
Following the release of the party manifestos, our corporate tax specialists give their initial thoughts on some of the proposals that caught their eye and what this could mean for you, your family and your organisation.
Laurence Field, Corporate Tax Partner has been providing tax advice for more than 35 years. His clients range from Global 1000 companies, fast growing start-ups, to family-owned businesses and charities.
The Proposal: The Labour Party have indicated they will cap the headline rate of corporation tax at 25% for the next parliament.
What it means
The headline rate has been 25% since 1 April 2023 and thresholds for paying it have lowered. Capping at a rate above the EU average (21%) or the world average (23%) is probably what the market will dictate anyway.
Our view
The headline rate is the least important component of the effective tax rate, restrictions on expense deductibility can increase it considerably. In recent years companies have had the amount of losses they can offset against profits restricted and the amount of interest deduction reduced. However, most businesses will appreciate a period of stability in the headline tax rate, providing there isn’t continued tinkering with the rest of the tax system.
The Proposal: The Conservative party have said they will extend the windfall tax on oil and gas companies.
What it means
More formally the energy profits levy, it has already been extended to 2029. Any further extension will make it seem permanent.
Our view
Shell paid £240 million in Energy Profits Levy in 2023 – it is clearly a useful source of income. The jury is out on whether investment will be diverted elsewhere and what this means for energy independence and the decarbonisation of the economy.
The proposal: The Conservatives propose to Lift the employee number threshold so that more companies will be considered medium sized for tax reporting purposes.
What it means
Companies have tax reporting requirements that become more onerous depending on their size. The tests are often anchored in the number of employees, though there are turnover and balance sheet tests as well. For example, for transfer pricing purposes a company with less than 250 employees is automatically medium sized and therefore subject to less onerous reporting standards than large companies. Raising this threshold would mean more companies could be considered medium sized and have less onerous reporting requirements.
The sustained period of inflation in the last few years, has shrunk the real terms value of some reporting thresholds, creating a fiscal drag for administration and requiring businesses to divert resources into tax reporting.
Our view
Businesses should welcome any proposals to cut red tape. Getting the amount of reporting required to be commensurate with the size of the business should not be controversial.
The Proposal: Libdems want the introduction of 4% tax on the share buyback schemes of FTSE-100 listed companies, to incentivise productive investment, job creation and economic growth.
What it means
Around 35% of listed UK companies did share buybacks in 2023. It is seen as a more flexible way of returning cash to shareholders than dividends and may be a sign of a lack of profitable projects to invest in.
Our view
The US has a 1% share buy back tax and this is mirroring that approach. It has the political advantage that many people won’t understand what share buybacks are so it feels like a tax on someone else.
The Proposal: Reform have said they will impose an employers’ National Insurance surcharge on immigrant labour.
What it means
Employers hiring ‘non-British’ passport holders would pay employers NIC at 20% rather than 13.8%.
Our view
A clear attempt to encourage the hiring British workers – the challenge being that with economic inactivity rates as they are at present, there is currently a labour shortage. Increasing costs of employment (and the administration of the system) is likely to cause businesses practical and operational difficulties.
The proposal: Reform have promised to abolish IR35 to help support sole traders.
What it means
Broadly IR35 is the phrase used to describe the process that helps employers determine whether someone should be treated as self employed or as employee. It was introduced in April 2000, and amazingly, after nearly a quarter of century its application is still dogged by controversy, high profile court cases and has been blamed for over 50s withdrawing from the labour market. Tax is easier to collect from employees, so successive governments have been keen to ensure that ‘hidden’ employment is reduced.
Our view
IR35 remains a bugbear for employers and contractors. It’s abolition would probably be welcomed, but a replacement process would still be required to avoid abuse of the tax system.
Andrew Hawley, Corporate Tax Partner works predominantly with large and medium corporates, which often have international operations and varying ownership structures including private equity backed, listed and privately owned.
The Proposal: The LibDems manifesto pledges to work internationally to increase the Pillar 2 global minimum rate of corporation tax to 21%.
The OECD’s two pillar approach to tackling the tax issues of an increasingly digitalised global economy are reliant on having sufficient buy in from countries around the world. The second phase of proposals (often referred to as Pillar 2) focus on a global minimum tax which involves the largest multinationals paying a top up tax at parent company level if income generated further down the ownership chain has been taxed below the global minimum rate. The UK introduced a minimum tax rate of 15% effective from January 2024.
Our view
The global minimum tax has been far from easy to implement to date. While some countries, such as the UK, have moved to enact legislation quickly others, such as the US, have still not implemented domestically. There are numerous tensions between nations including some having concerns over the rate being too high and impacting the effectiveness of tax incentives which allow them to compete with countries that have certain economic advantages and other countries flagging concerns that the rate is too low and will negatively impact their domestic tax position. Therefore, a proposal to increase the global minimum rate to 21% at such an early stage when some countries haven’t even adopted domestic rules yet wouldn’t appear to be one of the easier options to generate further UK revenue quickly and such time and effort might be spent more effectively in other areas.
The Proposal: The Conservatives have pledged to raise at least a further £6 billion a year from tackling tax avoidance and evasion to reduce the tax gap and both Lib Dems and Labour have promised to give HMRC the resources it needs reduce tax avoidance and evasion. This is across all taxes.
What it means
The tax gap is the difference between the amount of tax that should theoretically be collected by HMRC versus what is actually collected. The amount of tax actually collected from companies is estimated to be a lot lower than what should be collected for many reasons including errors, carelessness, evasion and avoidance. Given the lack of current HMRC resource and the complicated nature of the UK tax system any actions will need careful planning so that companies aren’t subjected to unnecessary compliance costs, delays and interruption.
Our view
The UK tax system is complicated and in desperate need of simplification. Success in this area will require a clear plan on how HMRC resource can be best used to close the tax gap from both a corporate and wider tax perspective. With limited detail on how HMRC resource will be managed/increased and technology solutions, such as making tax digital, not yet fully implemented across all taxes, the tax gap doesn’t seem a reliable source of additional revenue in the short to medium-term.
Alex Conway, Partner in Professional Practice and Private Clients advises clients on a range of personal and partnership tax matters, his specialisms include advising on carried interest, disguised investment management fees , basis period reform, international expansion and salaried members legislation.
The Proposal: Labour have identified the taxation treatment of carried interest as something which they consider is in need of reform.
What it means
Carried interest is a share of the overall profits of a private equity fund paid out to the fund’s investment managers. These payments are triggered when a fund exceeds a specified level of profitability or hurdle rate of return, agreed with its investors.Typically individuals working for the fund manager receive these profits directly from the fund in a personal capacity. Carried Interest is subject to specific tax rules. In essence, where the carried interest reflects a return from income type returns (such as interest or dividends) it will be taxed as income and where it represents capital gains made on long term holdings these profits are assessed at a premium capital gains rate (28%).
Our view
Some politicians have described this as a loophole, which seems to mischaracterise it. The taxation follows the treatment dictated by the legislation. In reality it is a consequence of the distinction drawn in most international tax systems between the difference in taxation of gains made from capital appreciation and income generation. Carried interest viewed in this light is no different to an employee being awarded shares in a start-up company. If the business performs well any increase in the share price resulting in a gain on future disposal would be subject to capital gains tax.
An incoming government will need to formulate its policy on this and it is to be hoped that this will be on the basis of consultation. Any change in the basis of taxation of such carried interest, should be considered from an international perspective. Many other jurisdictions have similar carried interest regimes to the one currently operating in the UK and a change to increase the level of tax on carried interest would leave the UK at a competitive disadvantage. In our view attracting private capital to the UK should play a part in growing the economy.