Labour Intensive - A High Impact Scenario

With Boris Johnson now installed as Prime Minister, attention turns to his first 100 days and the material possibility of a Labour-led government by its end. Our latest scenario analysis shows a 70% chance of a General Election before 31 October 2019 (Johnson’s Day-99) within which a 28% chance of a Labour-Led government. In this article we have brought together the views from our specialist team of leading lawyers and financial markets experts to look in more detail at the Labour Party programme and its possible implications for all stakeholders in UK assets.

Simmons & Simmons has been tracking the Labour Party policy agenda and its possible implications for UK stakeholders for over a year. As we cross the threshold to Boris Johnson’s premiership we see an elevated chance of an early General Election leading to a Labour-led government.

A Labour-led government is not our central case. But given the materiality of the Labour Party agenda, even a moderate probability of it coming into power makes it worth examining in more detail.

Our central case remains Hard Brexit on 31 October 2019 under Mr. Johnson. But even that raises the probability of a General Election, and so the possibility of a Labour government, only a little further down the road if the economic consequences of Hard Brexit are as damaging as some forecasts suggest.

In this paper we bring together the views from some of the leading lawyers at Simmons & Simmons. Together they examine in more detail the main elements of its programme and the issues it may raise for UK stakeholders: from taxation and nationalisation of course but also international treaties and the far-reaching proposals to use the spending power of the government procurement programme to ensure compliance in the workplace to the Labour Party’s ESG agenda with particular focus on workers’ rights and reducing inequality.

Our scenario analysis

Having conducted scenario analysis around Brexit and the Labour Party for over a year we see the two issues now more entangled than ever before. The pathways around Brexit increasingly include outcomes that feature a General Election - currently our central expectation for the period before 31 October 2019. The betting market has a similar outcome with October the "favourite" month for the next election.

Between now and Hallowe’en, Prime Minister Johnson faces a likely series of challenges around his ability to "command a majority" in the House of Commons. He inherits a wafer-thin majority of three including the DUP, meaning only two Tories would need to vote against him to bring down his government and force a General Election (for example to stop Hard Brexit). That number could be reduced further with a by-election due and the possibility of another Tory MP, being "recalled" (a pre-cursor move to possible deselection and by-election).

Looking ahead to the possible outcome of any early election, our scenario analysis, using polling data and a model projecting the likely composition of Westminster, suggests neither of the main parties gains a majority (so too the betting market) but Labour has the best chance, at least arithmetically, of forming a coalition - with the Liberal Democrats. That said, any such coalition would have to resolve currently strong differences of personality/ policy around the leadership of each party.

We recognise that such models are challenged by the insurgent nature of the Brexit Party: there is simply not enough polling history that includes the Brexit Party to be fully confident in the projections. But the materiality of the Labour Party policy agenda makes even a moderate probability of it forming the government worthy of much closer scrutiny.

The issues raised for: Taxation

Labour’s 2017 Manifesto sets out a broad framework for a significant redesign of the UK tax regime - rebalancing as they would see it from taxation of labour to taxation of capital. Notable proposals include:

  • increases in personal and business taxes
  • extension of the existing General Anti-Abuse Rule into a broader General Anti-Avoidance Rule
  • targeting perceived loopholes (such as the taxation regime applicable to carried interest)
  • extension of stamp duty to a broader financial transaction tax, and
  • proposal for inclusive-ownership funds
    • a novel approach to generating additional tax revenues, through dividends paid by relevant companies that exceed £500 per employee being passed to the Treasury.

Alongside this, we see Labour adopting a twin focus on investment and transparency:

  • investment, by allocating a further £200m of funding to HMRC and the creation of a Tax Enforcement Unit, and
  • transparency, through publication of high net worth individual and large corporate tax returns, the adoption of full country-by-country reporting and a focus on identification of the beneficial owners of companies and trusts.

There is also the question of what didn’t make it into the Manifesto. A key question-mark exists over the potential introduction of a wealth tax - when, at what rate(s) and in respect of which assets?

The issues raised for: Real Estate

Although not an official Labour policy document, the “Land for the Many” report issued in June 2019 contains a broad series of recommendations to reform how what is referred to as “our fundamental asset” is used, owned and governed. We expect many of its proposals to be adopted in any future Labour Party manifesto at the next General Election.

Amongst the proposals, we see significant reforms to property taxation through:

  • the replacement of council tax with a “progressive property tax”
    • targeting owners not occupiers, and
    • tackling empty or second homes, investment properties and non-resident owners.
  • business rates could be replaced by a land value tax
    • based on the rental value of local commercial land
  • stamp duty land tax would be phased out for primary residences
    • but retained for second homes and investment properties, and
    • in addition, capital gains tax rates for second homes and investment properties would be aligned with income tax rates
  • new lifetime gifts tax would replace the current inheritance tax regime and related real estate exemptions and reliefs.

Alongside the tax proposals, there would also be systemic reform. As a number of the tax proposals may affect house prices due to their impact on buy-to-let and similar investors, a novel “Common Ground Trust” has been mooted, a non-profit organisation that would stabilise prices whilst providing a mechanism for prospective purchasers to buy their homes in a more affordable way.

And at a macro-economic level, the Bank of England will be tasked with targeting house price inflation, to enable wages to catch up as house prices stabilise. We also see a greater focus on local issues, including community ownership of land, and a democratisation of real estate through measures such as an expanded right to roam.

The issues raised for: Infrastructure Investment - The Nationalisation Agenda

A key feature of their 2017 manifesto, nationalisation of key UK infrastructure, has become a Labour economic policy cornerstone. The plans most recently issued in “Bringing Energy Home” (May 2019) also link the nationalisation policy to Labour’s Green Industrial Revolution. Perhaps mot notably for UK stakeholders is Labour’s plan to make nationalisation extremely difficult to unwind by a future non-Labour government.

Labour Party nationalisation rhetoric covers a wide range of the UK’s key economic and social infrastructure:

  • water, energy networks (transmission, distribution and recently a threat it will extend to retail energy companies), rail, mail and PFI.

But details on the proposals have been slow to emerge and there is still little clarity on key issues such as costs, timing, orders of priority, compensation, mechanisms.

That said we have pieced together our own views on some of the likely elements which we can discuss on further enquiry.

Labour’s proposals for energy include

  • a “nested system that combines decentralisation and local national planning, and a fair allocation of costs.”

It is intended to allow decision-making at regional and local levels and involves setting up a National Energy Agency, Regional Energy Agencies, Municipal Energy Agencies and Local Energy Communities. Labour acknowledge this will be a challenging structure to implement.

But, if successfully implemented, we believe the outcome would be that this system of national, regional and local structures would become so deeply rooted in local infrastructure and politics that it would become very hard to unwind in the future without engendering significant political and economic risk and enormous disruption.

Taken together, the plans to nationalise and to make it difficult to reverse in future, Labour’s plans create a key immediate question - will investors get paid compensation if the plans materialise and if so how much? As with other aspects of Labour’s nationalisation plans we believe we can provide some insight into considerations around compensation and will be happy to discuss those on further enquiry.

The issues raised for: Suppliers to Government

Labour policy sets out a far-reaching agenda that broadly seeks to increase diversity and decrease income inequality. It proposes a novel but potentially powerful tool with which to achieve its desired outcomes - the proactive use of the UK Government’s £200bn annual procurement budget to further promote its ESG (environment, social and governance) goals and to ensure the “best standards on government contracts”.

The proposals will require any company tendering to Government (whether suppliers of widgets, infrastructure or asset management services) to be able to confirm it is compliant with a range of ESG factors to be considered for tenders including:

  • paying own suppliers within 30 days
  • paying taxes
  • protecting the environment
  • providing training
  • reducing boardroom pay to meet a 20:1 pay gap
  • recognising trade unions, and
  • respecting equal rights of workers from day one of their employment.

If non-compliant then bidders (and we presume their own supply chains if part of the bidding offering) would be denied access to these business opportunities. We believe these proposals could be implemented quite quickly and are happy to discuss our understanding on further enquiry.

The issues raised for: Corporate Structure, Law and Employment

The public procurement proposals outlined above raise significant practical issues for firms who wish to bid directly or to invest in firms on the basis of anticipated tenders.

But the current Labour policy proposals contain much more that is of interest from an employment law, company law and corporate structure perspective - including:

  • a manifesto pledge to amend company law so that directors owe a duty directly to employees, customers, the environment and the wider public
  • a pledge to give employees a first refusal “right to own” if the entity they are employed by is to be sold
  • “Inclusive Ownership Fund” proposals whereby companies with over 250 employees would be obliged to transfer shares into an Inclusive Ownership Fund - a phased transition of 1% per annum to a maximum holding of 10% with the holding to be managed and held collectively by employees (with capped dividends of up to £500 each distributed directly to employees and any surplus paid to HM Treasury, and
  • Excessive pay levy - to be applied by companies to individuals whose remuneration exceeds a specific “high pay” threshold.

These are in addition to a wider range of more “business as usual” proposals including with regard to greater clarity, extension of and codification re: workers’ rights, banning zero hours contracts, continued focus on expanding equality protection (some points of which are already being progressed via consultation by the current government) and unwinding some of the revisions to Trade Union and TUPE legislation under the current government.

Overall - unsurprisingly - the focus remains heavily on extending and strengthening workers’ rights and security and equality at work. As a package, the proposals involve some significant practical considerations for firms.

The issues raised for: Bilateral Investment Treaties

The Labour Party’s nationalisation proposals raise many questions including that of possible compensation for stakeholders.

There are broadly two avenues through which to arrive at a determination of any compensation: the European Convention on Human Rights (ECHR) and the provisions of any applicable bilateral investment treaty with the UK.

English law currently incorporates the ECHR as part of domestic law which provides a qualified right for compensation in the event of nationalisation. That provision rests on two conditions

  • the qualified right will not be breached if the nationalisation strikes a fair balance between public and private interests, and
  • if the right were breached, the compensation that would be payable need only be reasonable in the context, which gives the State considerable latitude in assessing the compensation it is prepared to pay.

All of which said there is finally the theoretical possibility (at least) that any incoming Government could repeal the legislation incorporating the ECHR into English law leaving disgruntled investors only with the option of bringing claims before the European Court in Strasbourg, a forum with which the UK Government has previously had a somewhat laissez faire relationship.

An alternative to the ECHR route is to seek compensation under any applicable bilateral investment treaty (BIT) to which the UK is signatory. The UK has agreed nearly 100 BITs with foreign States which provide that investors from those foreign States into the UK are entitled to a number of protections in international law including:

  • no expropriation without compensation, fair and equitable treatment and resolution of any disputes under the treaty applying international law before an international arbitration tribunal (our emphasis added).

If an investor into the UK has an investment treaty that meets the relevant standards then it could be entitled to full market value compensation for any investments nationalised by a new Government. We are happy to provide further details on BITs on further enquiry.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.