The Chancellor's Pre-Budget Report on December 9 is likely to be
dominated by a return to traditional Labour values, according to
accountants and business advisers PKF.
With the economy yet to formally emerge from recession and the
2010 General Election months away, the Chancellor will be obliged
to set out tax and fiscal policies that clearly differentiate
Labour from the other parties, predicts the firm.
Sarah Moss, PKF tax director in Birmingham, said: "Most
economists agree that taxes will have to rise in the future so we
may well see some eye catching traditional Labour moves to increase
the tax burden on the wealthiest mixed in with more modest efforts
to support business."
Last year's £12bn per annum cut in VAT is to be reversed
on 1 January 2010 when the VAT rate returns to 17.5%. Alistair
Darling will also press ahead with the 50% higher rate tax for
those with incomes of more than £150,000 per annum from
April, though it is unclear whether this will raise the hoped for
amount of revenue.
Sarah Moss added: "The Chancellor has already made it clear that
significant further measures to raise tax are not on the agenda for
now but he will want to show that he has a plan to bring government
finances into balance in the medium term. This is why the Fiscal
Responsibility Bill is going to be debated in Parliament with the
Pre-Budget Report. It may also mean a number of consultation
exercises on future tax rises are announced.
She predicts:
• The Chancellor may choose to cut some costs by reducing
the upper income limits for means tested benefits such as the Child
and Working Tax Credits - currently families with annual income of
up to £66,000 can benefit from Child Tax Credits.
• A tightening of IHT allowances and exemptions for
wealthier estates could allow a clear difference to be seen between
Government and certain opposition proposals; for example, 100%
Business property Relief might be limited to businesses worth
£5m or less, with a lower exemption applying to more valuable
businesses.
• The Chancellor may also propose substantial increases in
environmental taxes over the course of the next Parliament. An
increase in the current climate change levy is likely to be one
option, with specific taxes targeting goods and services creating
high emissions and further high taxes on cars also likely to be on
the menu. Naturally, with the General Election in mind, any
consultation document on such issues is not likely to be specific
and leave the tough decisions until the new parliament.
• There may be an increase in the rate of capital gains tax
to 25% from next April, though with a lower rate for the disposal
of business assets. The difference between income and capital gains
tax rates is significant and is already starting to influence
taxpayer behaviour, as individuals seek capital gains rather than
income returns.
• As an outside bet, rather than simply restricting higher
rate [40%] relief on pension contributions for those on high
incomes, such relief may be abolished - saving the Exchequer
billions per annum.
And what of City fat cats?
"The Chancellor has already made it very clear he favours the
use of share schemes and options rather than bonuses to reward the
higher paid employees of banks and city executives," said Ms
Moss.
"A new type of 'approved' long term share scheme may be
announced as a way to counter 'the bonus culture'. However, a new
special rate of income tax or NIC on large cash bonuses cannot be
ruled out. Neither can it be assumed that such an increase will be
limited to the banking sector.
"This will be one of the most political pre Budget reports we
have seen in recent years, though the Chancellor will wait until
the Budget to spring any rabbits out of his hat."