By Richard Mannion, Head of National Tax at Smith & Williamson
With a deficit of £178 billion and promises to reduce this by half in four years, any tax concessions in the Budget are likely to be short term, making substantial tax rises a simple matter of timing. Higher earners and the financial services sector are likely to bear the brunt.
Whichever party wins the election will need to fill its fiscal bucket. 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.
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 £5 billion per annum, making this a tempting option. The downside is that it immediately raises inflation.
Capital gains tax will almost inevitably 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 current 40% higher rate of income tax could rise to, say, 43% or 45% — bridging the gap to the new top rate of 50% — although we would not expect to see this in this Budget.
Further taxes could hit the financial services sector and salary sacrifice schemes, which are widespread, are also likely to be under the Chancellor’s spotlight. 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.
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 suffer significantly.
The Chancellor is unlikely to make many, 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.
A round-up of possible changes to be included in the Budget:
CGT — up, perhaps from 6/4/10
VAT — up, later this year
Income tax — increases to 40% rate, but not yet
Tax on transactions — possible introduction
Tax anti-avoidance — stricter application of existing rules
If you would like further information, before or after the Budget, please contact: Richard Mannion, National Tax Director, on 020 7131 4252 or email email@example.com
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