Tax has been a hot topic for all political parties in the run up to the UK general election on 4 July 2024 with numerous tax assurances and proposals included (to varying levels of detail) in the recently published election manifestos (for further details, see our UK election manifesto comparison here).
Businesses – and individuals – will be monitoring the proposals with interest, with Labour, for example, announcing changes affecting the tax treatment of carried interest, the Energy Profits Levy (aka the windfall tax on oil and gas companies), the tax regime for “non-doms”, and VAT on school fees, amongst other things.
But how quickly could these measures start to take effect? This blog post takes a look at the UK process for enacting tax legislation and the ways in which the government can seek to give prompt effect to tax proposals.
The UK Budget and Finance Bill process
The UK tax legislative process is an ongoing cycle throughout the year. Tax measures can be announced anytime, and will typically involve a period of consultation on the general proposals and/or the draft legislation – this has in recent times been in line with the Conservative government’s commitment in its Tax Consultation Framework that draft Finance Bill clauses should be published for consultation at least three months before the Bill is introduced to Parliament. The UK Budget is a key milestone in this cycle, at which the Chancellor of the Exchequer makes the Budget statement to the House of Commons and outlines the Government’s tax proposals, although often the tax announcements at the Budget have been well trailed in advance. Following the Budget, the House of Commons will debate the Budget resolutions for four days and these resolutions, once passed, will form the basis of the Finance Bill.
Typically, a Finance Bill is introduced to Parliament a few weeks after the Budget takes place. The Finance Bill will then go through the various Parliamentary stages in the House of Commons and House of Lords, although notably – as a “money bill” – it does not require the approval of the House of Lords to become law (this is the reason a Finance Bill will be classified as being “substantively enacted” for accounting purposes once it completes the House of Commons stages). This process will typically take around 3–4 months. The Finance Bill will then receive Royal Assent and will enter into force as a Finance Act.
So when could, say, a Labour government pass a Finance Act?
The latest Labour manifesto commits to holding one major fiscal event a year, to be supported by an economic forecast by the Office for Budget Responsibility (OBR). The current Shadow Chancellor Rachel Reeves has also reportedly confirmed that she would abide by the convention that the OBR should be given at least 10 weeks’ notice to prepare its economic forecasts.
Taking these points together, this seems effectively to rule out the prospect of an incoming Labour government convening an immediate emergency Budget in July before a summer parliamentary recess. This means the earliest a new Labour government is expected to hold a Budget is mid-September, albeit draft legislation on some measures may be published in advance of that. However, this is likely to clash with the party conference season and expected associated House of Commons recess, with the result that the first Budget of an incoming Labour government seems unlikely to take place before the beginning of October 2024, with a Finance Bill to follow thereafter and the legislative process completed, and the Finance Act enacted, in the first quarter of 2025.
This could perhaps pave the way for a regular Autumn Budget (as Labour’s promised one major fiscal event of the year), with an annual Finance Act coming into force in the following Spring (which as it happens was the exact Budget timetable proposed by the then Conservative Chancellor, Philip Hammond, at the Autumn Statement 2016 but which has rarely been adhered to due to intervening political and global events).
Does this mean that Labour tax proposals will not take effect until 2025?
The broad answer to this question is: it depends. Many tax measures in a Finance Act will not take effect until either the date of Royal Assent or the beginning of the next fiscal year (1 April for corporation tax; 6 April for income tax). This is helpful from a taxpayer certainty perspective and in line with the generally recognised principle that tax legislation should not be retrospective.
However, in some cases the government will want tax changes to have effect from a date before Royal Assent, for example if it wishes to correct an error in prior legislation or close a tax avoidance “loophole”. There are various means that have been utilised to achieve this in the past.
First, some tax measures announced during a Budget (or other “fiscal event”) may be given provisional statutory effect, either immediately or from a date after the Budget but prior to Royal Assent of the relevant Finance Act, by the passing of a specific type of “Ways and Means Resolution” of the House of Commons. Such a Resolution has temporary statutory effect as if contained in an Act of Parliament, but continuation of this status is subject to various conditions being met, including that a Finance Bill including the tax measures must have its second reading in the House of Commons within 30 sitting days of the relevant Resolution being passed and that the provision must be enacted in a Finance Act within seven months. This mechanism was recently used, for example, to ensure that certain exemptions from the higher rate stamp taxes charge on the issue and transfer of shares and securities of UK incorporated companies into a clearance service or depositary receipt system survived a sunset provision in the Retained EU Law (Revocation and Reform) Act 2023 that came into force on 31 December 2023. New exemptions were given immediate temporary statutory effect from 1 January 2024 via Ways and Means Resolutions and given permanent effect in the Finance Act 2024.
Second, a Finance Act may include provisions intended to prevent the taking of action to avoid the application of new tax measures before those measures come into force – so-called “anti-forestalling” measures. Anti-forestalling measures effectively provide that any steps taken between the date of announcement and the date the legislation comes into force which are intended to avoid the application of the new legislation will be deemed ineffective. For example, rules reforming the taxation of gains made by non-residents on UK real estate were introduced in the Finance Act 2019 with effect from April 2019. However, they included anti-forestalling measures, for example a rule (retroactively effective from November 2017) targeting the use of double tax treaties to escape the new charge on non-residents, with the result that taxpayers that would be caught by the new rules were unable to take identified pre-emptive action to restructure out of the incoming rules following the announcement of the rules in November 2017.
Finally, a protocol has evolved that allows the government to introduce retrospective tax legislation in exceptional circumstances where there would otherwise be a significant risk to the Exchequer. Broadly this allows the government to announce, by way of a Written Ministerial Statement, an intention to change tax law with retroactive effect from the date of announcement, on the understanding that legislation to give effect to the measure will be included in the next available Finance Bill. Any such ministerial statement must be clear as to the timing of the change in law as well as the nature of the legislative change. This procedure is used sparingly, but, for example, was employed earlier this year to announce that the next Finance Bill would introduce a new anti-avoidance provision into the UK’s “Pillar 2” tax rules, with retroactive effect from the date of announcement, to deny the application of a transitional safe harbour if certain types of hybrid arbitrage arrangements have been entered into (although the election has cut across this process and it remains to be confirmed if an incoming Labour government will include this in the next available Finance Bill).
So where does this leave us?
If the election produces a Labour Government, it is quite possible that we will see an Autumn Budget in September/October 2024 followed by a Finance Bill that receives Royal Assent in Spring 2025. However, as discussed above, this doesn’t mean that their promised tax measures will not end up impacting taxpayers before that date. It remains possible that proposed tax changes and/or related anti-forestalling measures could take effect from an earlier date, including the date of an incoming Labour government’s first Budget. It is even possible that Labour tax measures could be declared to take effect before the date of such Budget, particularly if such tax measures are badged as addressing anti-avoidance or anti-forestalling actions (and sufficiently detailed information about the particular tax measure can be made available).
On the other hand, whilst this approach may be adopted for genuine anti-avoidance measures, Labour’s manifesto includes a commitment to publishing a roadmap for business taxation for the next parliament and wider commitments to providing certainty to business. So, the hope is that Labour is aiming for a more measured approach to the introduction of its tax proposals, with, for example, a period of consultation with stakeholders before introducing measures and/or publishing draft legislation. It is undoubtedly the case that taxpayers would welcome such an approach to allow for greater certainty and better law-making.
If you would like to discuss in further detail any of the points raised in this blog post, please contact the authors or your usual Freshfields contact.
