For businesses, tax will be one of the big issues arising from the 2019 general election. Whatever the result, we expect to see changes in the UK tax environment.
With some big policy differences between parties, which could lead to very different outcomes, businesses should be assessing all potential scenarios.
In this guide, we look at business tax issues. But employers should also consider the employment tax issues arising from the election, which we have addressed in our separate guide on workforce and talent.
Here are five key areas of business tax that could change significantly as a result of the election:
Corporate tax: base rate and reliefs
The Conservatives are proposing to freeze corporation tax (CT) at 19%, dropping previous plans to cut the rate to 17% in 2020. They have also announced a modest increase in incentives for R&D (tax credits for R&D up by 1%, from 12 to 13%) and potentially widening the definition of R&D to cover areas such as cloud computing.
Labour have confirmed their pledge to return corporation tax to the 2011 level of 26% over three years (21% in year one, 24% in year two and 26% in year three) and a reintroduction of the small profits rate of 21% for profits under £300,000 (also phased in). Labour would conduct a major review of tax reliefs and have said they would phase out R&D tax relief for large companies and patent box over the life of the next parliament, replacing these measures with more direct funding for innovation instead.
The Liberal Democrats have proposed taking CT back to 20%, and have previously proposed a more standardised approach to corporate tax reliefs.
Brexit: indirect tax and international activities
Brexit is at the heart of this election. The different approaches of the parties to Brexit will have significant tax implications, from indirect tax through to withholding tax and transfer pricing.
The Conservative manifesto pledges to leave the EU by 31 January 2020, with a transition period to end by 31 December 2020. It also pledges to keep the UK out of the single market and from any form of customs union. This will have implications for international tax, with the possibility of some tax treaty implications from 31 January, and further withholding tax changes from 31 December. It also means that new customs arrangements will apply from the end of 2020, when the UK will also leave the EU's VAT system. The ‘Irish protocol’ will create special customs and VAT arrangements in Northern Ireland.
Labour is committed to negotiating a ‘soft Brexit’ deal which includes a customs union with the EU, before putting this deal to a second referendum. Their deal could alleviate customs administration costs and it implies the removal of tariffs, but withholding tax considerations could still bite.
A 'remain' vote in a second referendum would avert any changes to UK-EU customs and VAT regimes and withholding tax implications.
Capital gains: change coming
Both Labour and the Liberal Democrats have proposed significant changes around taxing capital gains in the same way as income. All parties have committed to reforming Entrepreneurs Relief in some way. Labour would scrap the measure; the Liberal Democrats would reduce its benefits; and the Conservative manifesto says that Entrepreneur’s Relief hasn’t delivered on its objectives and that the party will review and reform it.
All parties appear likely to favour tax reforms that focus more on incentivising capital investment.
Tax transparency and avoidance
All the main parties have set out actions plans on tax transparency and avoidance.
Both the Conservatives and Liberal Democrats have committed to introducing further measures to prevent multinational companies from profit shifting to avoid paying taxes, and to implement the Digital Services Tax. The Conservatives and Labour have proposed beefing up HMRC's enforcement units. Regarding multinational corporations, Labour has proposed treating groups of companies under common ownership as unitary enterprises, so that profits are treated as arising where economic activity occurs or value is created.
Across these manifestos there is also a range of taxation measures that will affect particular sectors. All parties are committed to reforming business rates and to a Digital Services Tax. The Conservatives would also introduce a single-use plastics levy, and Labour has set out a range of targeted measures including a financial transaction tax, an end to the charitable status of private schools and an increase in taxes on private medical insurance premiums.
How quickly could the changes occur?
If a Conservative government is elected on 12 December it seems unlikely that they'll introduce a new Budget until the new year, with many of the more significant tax changes coming when the UK leaves the EU.
A Labour government might well publish an emergency Budget Statement – possibly as soon as 13 December – which would enable them to make retrospective changes to the Budget following the date of that statement.
What can business do?
This election has the potential for significant changes to be made in the tax environment:
A Conservative government pursuing Brexit will result in significant changes to indirect taxes
A Labour government embarking on a radical programme of tax reform
A hung parliament, which could delay or restrain any of the above
Faced with these alternate futures, it is prudent to act now and ensure your business is prepared for whatever the result brings.
Review your tax strategy
Map your company's exposure across all taxes and agree where your top risks and opportunities are in different scenarios. Identify if there are any common areas of risk or opportunity across the various election and Brexit outcomes, and whether any ’no regrets’ decisions can be taken now. Identify any contingency actions and lead times to assess what and when you would need to act.
Take a ‘whole tax’ approach
Faced with different scenarios across corporate tax, capital gains, international taxation, tax transparency and sectoral specifics, businesses need to take a ‘whole tax’ approach to reviewing points of exposure and opportunity. Looking at the entire tax system in the round is essential. Transfer pricing needs to be considered in any structural changes of location of activities post-election. Given you may be considering moving certain business activities to other jurisdictions, whether due to Brexit or wider election considerations, you need to assess the secondary tax impact too – how does any shift of activity affect transfer pricing and cash extraction?
For advice on how the election result could affect your tax position, contact Lee Holloway.