UK: Budget Predictions: Tax Rises A Matter Of Timing

Last Updated: 23 March 2010
Article by Smith & Williamson

VAT and CGT front-runners for increases in the short term, with rises to income tax and NICs for higher earners likely in the medium term.

The Budget undoubtedly provides an election platform for the Government, but with a deficit of £178billion and promises to reduce this by half in four years, any tax concessions are likely to be short term, making substantial tax rises a simple matter of timing. Higher earners and the financial services are likely to bear the brunt.

"The reality is that the Government – whoever wins the election – will need to fill its fiscal bucket," said Richard Mannion, national tax director at Smith & Williamson, the accountancy and financial services group.

"A VAT rise must be top of the agenda, but perhaps not introduced until later in the year. Every one per cent increase in VAT brings in just under £5billion pa, making this a tempting option. The downside is that it has the immediate effect of adding to inflation."

"Capital gains tax is almost inevitably set to rise – possibly from as early as 6 April – since the current rate of 18% is much less than the higher rates of income tax, which encourages people to seek ways of converting income into capital."

"The big earners for the government are income tax, national insurance and VAT. Together, these taxes typically represent around 75% of the government's annual revenue. So unless there are tax rises in one or more of these areas in the not too distant future, the government will have very little chance of balancing the books."

"For example, the current 40% higher rate of income tax could rise to, say, 43% or 45% - although I would not expect to see this in the March 2010 Budget."

Richard believes that salary sacrifice schemes, which are widespread, will also be under the Chancellor's spotlight and that further taxes could hit the financial services sector. He added:

"We can be certain of an increasingly hard-line approach from the authorities to complicated tax planning and a renewed emphasis on rooting out tax avoidance."

"I anticipate the Chancellor will make few – if any - unappealing announcements in the Budget. The majority of tax increases, however, will emerge later this year or next year once the election has come and gone."

"While the Chancellor needs to be realistic, it is important that we don't stamp out nascent green shoots. Fiscal-raisers are necessary, but businesses and individuals need the Government to take a measured approach, " continued Richard.

A round-up of possible changes to be included in the Budget are outlined below:

  • CGT – up, perhaps from 6/4/10

It is only right that gains on long-term capital investments are taxed at a lower rate than income. However the decision to move to a flat-rate of CGT at 18% in 2008 now looks at odds with a top rate of income tax of 50%. This differential is encouraging taxpayers to seek out ways of re-designating income as capital.

Consequently the CGT rate on short-term gains could be increased from its current flat rate of 18% to make it less attractive to reclassify income.

There have been rumours that the generous treatment of second homes could be restricted following the unfortunate attention regarding MP's arrangements, but a recent debate in the House of Commons indicates that no action is planned at this stage.

  • VAT – up, later this year

Although the standard VAT rate returned to 17.5% on 1 January 2010, there are likely to be further increases in the pipeline. As the average rate of VAT in the EU is almost 20%, and each 1% increase brings in just under £5billion, the Chancellor must be sorely tempted. However, any VAT rise will have an immediate impact on inflation.

  • Income tax – increases to 40% rate, but not yet

We already know that a new 50% top rate of income tax will apply from 6 April 2010 on taxable income over £150,000. The 40% rate, which currently applies on earnings over £43,875 could be increased to 42% or even 45% but it would hit the mass affluent so would be unattractive politically just before an election.

  • Tax on transactions – possible introduction

Recent EU discussions have considered a levy on financial transactions or 'tobin tax'. This could be a significant money-raiser for the government but success would require agreement across different jurisdictions to make sure that all countries apply the tax equally. Without a multi-lateral approach, markets could be severely distorted causing a loss of business to those financial centres that do apply the tax. Given that London accounts for around a third of all foreign exchange trading in the world, the UK economy could be suffer significantly.

  • Tax anti-avoidance, stricter application of existing rules

A harsher approach from HMRC is already evident, with rules and penalties strictly applied. Moreover, HMRC has improved powers of inspection and more information at its disposal, giving greater scope to pinpoint tax evasion.

We do not anticipate major rule changes in terms of tax avoidance, rather implementation of existing legislation. However, the Human Rights Act means that any penalties must be proportionate putting HMRC under pressure with regard to some of the current penalties which are charged irrespective of the gravity of the offence.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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