With the Labour Party coming to power, there are a lot of questions and uncertainty around what the labour government effect on businesses will be and what the economy may look like, given that they haven’t been in power since 2010. Their manifesto has cleared up some of that outlook, but what does this mean in terms of how your business will be affected over the next four years?
This article aims to look at some of the major impacts to businesses from what the Labour Party are currently looking to implement.
Background
With Labour coming to power, there is a positive outlook for companies and the economy around growth prospects and the tax position going forward. In their general election campaign, the plans to reignite economic growth was a main focus, with the Shadow Chancellor of the Exchequer, Rachel Reeves, pledging to lead the most “pro-growth, pro-business Treasury our country has ever seen”. Rachel Reeves has talked about this multiple times before with her plan for ‘securonomics’ in which she plans to help stabilise the economy through investing in areas that the UK does not particularly thrive in, and not simply leaving market forces to come to their own equilibrium.
The Labour Party has also stated that they do not wish to return to austerity measures that the Conservative Party used from 2010, which should allow them to boost Government spending and promote the growth that they are looking for. When we look at how the Gross Domestic Product (GDP) has been affected by these strategies of austerity, along with other global impacts, we can see that GDP is lagging behind where it currently should be. This graph comes from the Institute of Fiscal Studies (IFS) to show the GDP gap from pre 2008 trends.
This boost in the economy is definitely welcomed, although a main driving factor for these growth plans this is that the Labour government has committed to the fiscal rules of government debt projecting to fall as a share of GDP in the fifth year of a five year forecast from the Office for Budget Responsibility (OBR). To not return to these austerity measures, the Labour Party will need their growth plans to come to fruition as they have only left themselves a fine window in order to meet this forecast from the OBR. Given that the assumptions and projections for growth appear ambitious, we could be looking some big changes for businesses for targets to be met.
Analysing The Labour Government Effect on Businesses
Tax Implications
When we look at a Labour government effect on businesses, from the outset there are a lot of positives for businesses as Labour have ruled out raising taxes for income tax, national insurance and VAT. All three of these should allow consumers to have more disposable income to help boost their spending in the economy. From this perspective the outlook looks good for business by hopefully boosting revenue.
Corporation Tax
In terms of corporation tax, they have left some room in the manifesto’s wording so there could be changes to the corporation tax rates in the future. Given recent changes in 2023 with the corporation tax rate increasing to 25% for profits over £50,000, this hit to businesses could have a large impact on their cashflow. If there were to be further increases to this rate, or to alterations to the marginal relief, businesses could face increased difficulties for their tax obligations. We’ve already seen the impact that the increase to 25% has had on medium sized businesses and this has necessitated increased tax planning to ensure businesses are aware of the tax implications.
Capital Gains Tax
Capital Gains Tax (CGT) appears as if it could be set for an increase as Labour has only ruled it out for primary homes. The impact of this could scare off investors and take money out of the UK, so the Labour government would need to tread lightly with any increases so that they don’t damage their own growth projections by an increase on these taxation levels. However, with more wealth being tied up in assets this feels like the most likely target for increases in taxation. We could see a new schedule introduced for chargeable gains which currently have the same rates as trading income as the UK is currently one of the only countries that tax it at the same rate.
If this were to happen, then business will be affected by having investment taken out of the UK. Given that interest rates are also set to stay at the current rate and not reduce, even with inflation falling back to the 2% target, the cost of borrowing will be expensive for businesses, once again hampering cashflow for companies by reducing the amount of investment options available to them and increasing the cost of borrowing.
Business Asset Disposal Relief
Following on from the potential CGT rate changes, they could instead target Business Asset Disposal Relief (BADR) instead to increase this CGT. If they were to look at cutting this relief, removing it all together, the tax recovered would be massive for raising revenue. By cutting it completely, they would double the taxes recovered as the rate would increase from 10% to 20% on assets that previously qualified for the BADR relief.
This would greatly increase the tax recovered, however you again run the risk of stunting economic growth through reducing the investments in the economy as a whole.
Stealth Taxes
Even though Labour have said that there will not be a raise in certain tax rates, we will likely see an increase in the use of stealth taxes in order to help fund these growth strategies and debt management. The income tax and national insurance thresholds are currently frozen until 2028, so we could see these being extended, or even the raising of the likes of the sugar tax or narrowing inheritance tax reliefs. The impact of these is that with employee wages continuing to increase, more income will be taxed at the higher tax bands. Businesses end up being hit twice on these factors as consumers have less disposable income so may not spend as much as previously, but they are also paying out additional money through the cost of employer national insurance contributions.
Recommendations
When I looked through the potential impact of these legislations, it highlighted the need for businesses to plan for the future by monitoring their positions and looking at how these future changes may impact on the likes of their customer bases and cash flows.
Given these potential challenges I believe businesses should be looking into bookkeeping services and tax planning strategies so that they are able to properly budget and forecast their needs. These can provide crucial real time information about the business and allow for strategic planning to be effective. Even with the increase in corporation tax from 2023, we have seen an increased demand for this service to allow businesses to budget for this additional cost.
The increase in borrowing costs mean that it may not be beneficial to acquire company loans, or they may not have the cash flow to afford the ever-increasing financing costs, so the likes of cash flow forecasting become crucial to ensure that businesses can continue to trade and pay staff and suppliers. These forecasts help to plan out the future spends, and account for potential changes to different factors to assess the impact. Within this, you can then stress test variations to different factors.
If Labour’s proposals go according to plan, this brings up a different need for businesses, that of asset investment and capital extraction. If the growth rates come true and the economy starts to thrive, businesses should look to invest in capital expenditure as this continues to grow, and businesses can receive favourable tax incentives depending on the assets they are purchasing. Capital extraction then becomes important to ensure that surplus cash is extracted in the most tax efficient way possible.
Closing Thoughts
The labour government effect on businesses has a lot of potential benefits. Largely due to having a new political party in power, especially one that is looking to generate a lot of growth over the next few years. Businesses just need to make sure they keep themselves aware as there could be a lot of potential changes coming their way, both good and bad, so will need to ensure they capitalise on what they can and mitigate any potential downfalls from new policies. They should look to prepare for both potential outcomes, either growth expectations are met, and the economy picks up, or growth expectations are not met meaning there could be tightening to government spending and increases in taxation rates.
If you would like any further information around strategies your business can look to implement then please reach out to one of our accountants for the tailored support you need to help stay on top of future changes.
Author: Cameron McClurkin
