PBR 09: Will there be season’s greetings from Darling?

As we approach the festive season, speculation is heightening about what presents taxpayers, business and their advisers may expect.

But can chancellor Alistair Darling afford to fill their stockings with goodies in today's pre-Budget report?

Labour has been clawing back vital ground on the Tories in the opinion polls and in today's statement to the Commons the chancellor will attempt to ensure that the gap does not widen.

Darling cannot significantly slash public spending to fund any proposed tax cuts because he must keep the UK economy afloat, seemingly at no matter what the cost. Multi-billion-pound banking bail-outs and billions in deferrals on company VAT payments have taken a heavy toll on the UK’s coffers.

Advisers say Darling is unlikely to hand out generous tax benefits but will be more focused on tax efficiencies. He is expected to shy away from broad, harsh, tax-raising measures with a general election due in the spring.

But he could come down even harder on high-net worth individuals without losing swathes of potential voters. An easy move for the chancellor would be to hike the 18% flat rate of capital gains tax to bridge the gap between capital and income tax rates.

“Any change in rate will have a huge impact on the entrepreneurial community in the UK who have already been hit hard by the introduction of the 50p income tax rate from next year,” Grant Thornton warned.

Wealthy individuals face the new rate from next April and those who hold undeclared income in offshore centres have also been put on notice to come clean and pay what they owe to the taxman.

Richard Mannion, Smith & Williamson’s national tax director, warned that a beefing-up of tax avoidance rules focused on “everyday” tax planning rather than “heavily contrived avoidance” could also be on the cards.

However, David Kilshaw, private client partner at KPMG, is hoping a general rash of new rules will be avoided. “In view of the difficult economic climate we hope that the chancellor will announce a commitment to minimise changes to the tax system as well as to a limited finance bill in 2010. Hastily developed tax measures often have serious unintended consequences and we very much hope that this time the chancellor opts for an autumn statement light on tax changes.

“But with an election around the corner some voter-friendly rabbit-out-the-hat style tax measures are a distinct possibility.”

A reduction in corporation tax from the current 28% to 25% could be one way to keep powerful multinationals on side. If they remained in the UK it might also convince others to locate their headquarters to the UK rather than other European countries. But this is also a Tory policy, so Darling would run the risk of looking like he had stolen the idea.

Although unlikely, a further increase to VAT past the 17.5% threshold it returns to on 1 January is another option that advisers have not ruled out.

Back on the home front, smaller companies could find themselves under the cosh while their bigger siblings are kept happy. An increase in corporation tax for small businesses from the current 21% to 22% was announced a couple of years ago, bringing it closer to the rate for larger companies, but this was delayed because of the recession.

Given that any business making a loss during the downturn will not have paid corporation tax, there is a feeling the government could bring in the increase this time around for when companies are more likely to be in a tax paying position. National Insurance may also be ratcheted up to target those on very high earnings and the salary sacrifice regime could also come under attack.

“This could add up to some painful tax increases, but the chancellor should recognise the fragility of the economy," added Tim Lyford, head of corporate tax, at Smith & Williamson.

“No one can be sure we have reached recovery mode and he should moderate any revenue-raising ambitions accordingly.”

With speculation rising that HMRC is looking to set up a similar association to its Liechtenstein facility, the chancellor may even reinforce the stated aim of foiling tax evasion with an announcement.

The taxman has five or six offshore destinations on its wish list, advisers say.

On Wednesday, the speculation will be over and Darling will have made further changes to the UK’s tax system which he hopes will provide shelter from the financial storm. But with the ferocity of the global crisis, and the massive public deficit, it remains to be seen whether he will succeed.

Further reading:

Comment - Darling's last chance