11/11/2010

Increase in basic and higher rates could be top of the Chancellor's list

By Richard Mannion, Head of National Tax at Smith & Williamson

The Chancellor’s arithmetic is dependent on finding sufficient spending cuts over the next few years to provide for 80% of the total deficit reduction. Any shortfall will presumably have to be made up by further tax rises, which begs the question of where the next rise will come from. If the government is to balance the books, the Chancellor ultimately needs to focus on the big revenue generators of VAT, NIC and income tax to fill the gaping coffers. We already know that both VAT and employees’ NIC are to rise next year, which just leaves income tax in the frame with potential rises in both basic rate and higher rate on the shortlist of possibilities over the coming years.

In the Spending Review on 20 October Mr Osborne reiterated the plan to spend £900m on specialist investigators in HM Revenue & Customs (HMRC) to chase up those who had hidden money offshore and those who avoided paying the 50% top rate. But he also announced a 15% reduction in HMRC’s resources which could mean that any additional tax found by specialist investigators is exceeded by additional tax leakage from leaving the back door open. Service levels in HMRC have been dire for some time and the recent National Audit Office (NAO) report highlighted the need for action to be taken to reduce the delays in dealing with taxpayer post.

With this background, cuts in funding to HMRC simply do not make sense, as it needs to protect the wider tax base as well as investigating tax evasion through offshore bank accounts. HMRC was recently forced to write off millions in unpaid tax resulting from inaccurate PAYE codings. Cuts in headcount will make a repeat of such problems more likely. The NAO report mentioned the possibility of trusted agents being given greater access to the PAYE system in return for being registered by HMRC. The new cuts mean that lateral thinking like this is even more important.

The Chancellor announced a permanent levy on the financial services sector designed to produce about £2.5bn pa. In addition the EU has been looking at the possibility of further levies being imposed on financial transactions which could signal yet more pain to come for the banks, but with little sympathy from the taxpaying public at large.

For further information contact: Richard Mannion, National Tax director at Smith & Williamson, 020 7131 4252 - richard.mannion@smith.williamson.co.uk


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