As the UK approaches the final two weeks of the general election campaign, and amidst increased spending commitments from both the main parties, many UK- based private equity professionals are trying to assess how the outcome could affect the amount of UK tax they pay. Debevoise professionals have been asked to explain the tax policies of the main opposition party in the Labour party’s manifesto – It’s Time for Real Change – and the related documents published this month, even though current polling suggests that a majority Labour government is unlikely.

Labour’s proposed tax changes are certainly radical – far more so than those included in the 2017 election manifesto – and would affect all companies and individual tax payers, especially those in the “top 5%”. In many areas Labour’s commitments would represent a fundamental shift for the UK, going well beyond tinkering with rates and allowances and reversing some long-established regimes – even ignoring any changes that may not have been included in the pre-election manifesto of any party for fear of inviting advance tax planning.

Among the most eye-catching (although not surprising) headlines for many business professionals are abolition of so called “non-dom status” – the UK’s rules that allow certain non-UK origin tax residents to mitigate UK tax liability on non-UK source income – and the alignment of capital gains tax rates with those applicable to income. The annual capital gains allowance and entrepreneurs’ relief would be abolished. Reduced tax rates for dividends would also go.

Income (and therefore capital gains) tax rates would rise to 45% for those earning more than £80,000 and 50% for those earning more than £125,000 (labelled a “Super-rich Rate”). Tax returns for high earners – those earning more than £1m pa – would be published (along with those of all companies) and companies would face an “excessive pay levy” of between 2.5% and 7.5% on compensation that is paid to employees of over £300,000. The 7.5% rate would apply for those paid more than £1m.

Corporation tax rates would go up, although not quite to the levels the UK applied before recent cuts: Labour has committed to a main rate of 26% by April 2022 (with a small profits rate for less profitable companies). At the same time, a review of corporate tax reliefs is ultimately targeting additional revenue of £4.3bn. But much more significantly, there would be a significant change to group taxation. Endorsing a report that is highly critical of the current global corporate tax rules and that has gained some traction amongst academics, Labour would treat corporate groups that are “under common ownership and control as unitary enterprises” and levy tax on profits “where economic activity occurs and where value is created”. This proposal is different from, although is apparently aimed at the same mischief as, international proposals to tackle perceived tax avoidance by multinational companies, especially those that earn revenues from digital activity, and including the UK’s own “Digital Services Tax” that is due to take effect next April. Labour’s proposals appear to go much further and would affect all corporate groups, online and offline, domestic and international.

Alongside the widely trailed “Inclusive Ownership Fund” – which would require large companies to make a significant number of shares available for the benefit of employees and the government – these changes, whilst welcomed by those who want to see a "fairer" distribution of ownership, could be a disincentive for multinational enterprises looking to use the UK as their headquarters or as a holding company location.

Furthermore, in what would be a fundamental change from the UK’s previous position, Labour proposes to introduce a financial transactions tax using extensive changes to the UK’s “Stamp Duty Reserve Tax” as the vehicle. Like an earlier Labour proposal, this would extend stamp duty to equity and credit derivatives and corporate bonds, abolishing the market-maker exemption. In addition, these latest proposals would extend the tax to forex and commodities spot and derivatives trades and interest rate derivatives. Presumably in order to target avoidance, the tax would apply a “residence principle”, so that the application of the tax would not depend “on where the trade is transacted, but on who is carrying out the transaction”. This would seem to imply that UK resident taxpayers would pay the tax, while non-residents would not, even if the transaction was on a UK market. To what extent that would achieve the apparent objective of “less volatile short-term trading”, as well as raising nearly £9bn in 2023/24, is not clear.

There are, of course, many other proposals in these extensive documents, as well as a commitment to “the most comprehensive tax transparency and avoidance programme ever enacted in government”. The Labour party has already been subjected to public scrutiny on some of the detail and there will be more of that before 12 December.