Labour majority of over 170. What next?

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For financial professionals only

The sweeping Labour gains of yesterday’s General Election mean that firms involved in advice on personal wealth will be asking themselves some key questions: What exactly were the promises Labour made on tax? And, what are the likely implications for our clients?  

The Labour manifesto makes a commitment not to raise tax on working people. Which could leave the retired and businesses out in the cold. 

There are three legs to the Labour Party’s fiscal plan. The first is a public service plan to increase spending by around £5bn, on a list of 16 social priorities in areas like the NHS and education. The second is a Green Prosperity Plan costing another £5bn, funded from energy windfall taxes. And, finally, there is £1.4bn of departmental spending being reallocated to altered priorities – half of which comes from cutting spending on consultancy services to the public sector.  

So what?  

With total public spending in the region of £1.2trillion, this is very much a plan to fiddle about with 1% of the budget, tweaking a perception of things, rather than any root and branch reform. Social security spending alone is projected at around £318bn this year, for example. 

So, to answer our opening question, the biggest single number in the Labour Party’s costings is the £5.2bn they expect to raise from cutting tax avoidance. How will this be achieved? Their plan is to invest £855m additional funds into the HMRC to improve its collection performance. The amount of total uncollected tax is estimated by the National Audit Office to be around £36bn, a loss worth recovering when public spending is under huge pressure. 

The National Audit Office (NAO) is the independent body which signs off on the HMRC’s accounts. Their last audit report was on the Revenue’s performance in the year to April 2023, and it qualified those figures, on the basis of the level of fraud in SME R&D reliefs and Personal Tax Credits. In January 2024 the NAO published a follow up report ‘Tax Measures to Encourage Economic Growth’ which fleshed out some of the detail. What even non-nerds would be interested by is the fact that compliance activity by HMRC has still not recovered to pre-pandemic levels and that is to where this additional resource will be directed. There is bound to be some material payback on this investment as it will increase HMRC’s resources by 17%. 

So, on the face of it, the quick wins on collecting more tax will be at the expense of SME’s unjustifiably claiming R&D costs and from (working?) people’s abuse of Tax Credits. Will that be an end to tax increases? Much will depend on the strength of the economy versus the level of inflation. One can be optimistic and think that the anticipated growth of the next year or so will come through. That will ease the strain on public finances. Or, one can take a darker view of the prospect of higher tax on personal wealth. With invested wealth experiencing a bounce over the last year, few will be surprised if it escapes the new Chancellor’s attention, at the urging of the 210+ new Labour MPs anxious to have something to show to their constituents in return for their votes. 

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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